Selling a business can be a stressful event. Given the size of the asset – and likely it’s importance to your retirement – you can just imagine that there are going to be some […]
The Unsolicited Offer:
What To Do.
So, you received an “unsolicited” inquiry or offer to purchase your company? It’s flattering and can be tempting. It can also be fraught with danger. Read on.
The Unsolicited Offer: Understand the Buyer, Identify Pitfalls, and Develop a Game Plan
Has someone reached out with you to discuss the sale of your company? You’re not alone. Many entrepreneurs and business owners routinely receive unsolicited calls or letters suggesting to buy their company. While some are real, most are not. We call this the unsolicited offer.
Being the recipient of such an offer is often flattering and can be attractive. If the acquirer is a “brand name” player that is a major strategic in your space, then the offer might queue a fire drill for response. But in most cases, it’s best to understand the nature of these offers in general and have a plan in place to proceed.
The Battle Drill
When faced with an unsolicited offer, we work with clients through a structured response.
- Understand Buyer Motivations
- Identify Pitfalls
- Develop a Game Plan
We’ll cover this in detail below.
Understanding Buyer Motivations
Off-Market Deals. Smart buyers are always looking for a better than fair deal. Strategic buyers seek to deliver increased value to shareholders, and financial buyers (i.e. private equity groups) need to return yield to investors. It’s no secret that the best way to do this is to not overpay for a deal. In most cases these buyers are experienced, and they know a secret that we do too: a company that is on the market with a banker (like Quantive) is going to command a premium. One of the major reasons to retain a banker, obviously, is to help increase value. So, when a buyer is reaching out to you directly and seeking to source an off-market deal, it’s often a sure sign that they are a savvy player.
Deal Pipeline. Buyers like this frequently “kick the tires” on many deals – often dozens- to find a transaction. Case in point: we recently hosted an event with several private equity investors. One indicated that they were working off a pool of approximately 2000 companies. In the past year they have had conversations with several hundred. Of those, conversations matured with approximately two dozen to the point that they exchanged financials and discussed an LOI. Finally, they issued LOI’s on five with the intent of closing one. That’s some pipeline, right? You can bet that they aren’t going through this process to overpay on a deal.
Bottom-line: an off-market deal is nearly always attractive to a buyer. They can slow the pace of the transaction, have more leverage in negotiations, and aren’t negotiating against other bidders in a deal process. Conversely, all the advantages to the buyer are equally disadvantageous to the seller.
Let’s assume you choose to proceed ahead with a single unsolicited buyer. What’s likely to happen?
Re-pricing and Leverage. A business owner who prematurely commits to a single buyer forfeits nearly all negotiating power to that buyer. Oftentimes as a seller, receiving an LOI feels like the most important part of the deal. However, the only binding provision of the letter is exclusivity. This prohibits the seller from sharing information with, soliciting, or entertaining any other offer during the exclusivity period. Signing that letter formally passes negotiating leverage to the buyer. Once under a standstill, savvy buyers will often leave no stone unturned in diligence, resulting in “findings.” What’s a finding? It’s an opportunity for the buyer to re-price the deal. The buyer will have gotten the seller so committed to the deal that oftentimes they feel it is easier to proceed on the re-priced terms rather than to back out of the deal.
Time and Effort. We often hear from clients that they assume going directly to a sale without building out a CIM requires less effort and obviously no banker fees. The latter may be true, but the former is not. As part of the process for putting together a CIM and getting a seller ready, the banker is going to dive deep on background data. In our case, we would also start building out the data room to prepare for diligence. What happens with the unsolicited buyer? They are going to start asking for all the material that would need to go into a CIM. With no offering docs in place, the owner is forced to recreate that whole process themselves without the benefit of an experienced banker. Not only is this time consuming, but it potentially puts you at a disadvantage because of another asymmetry of knowledge.
Confidentiality. Some owners assume that because there is only a single buyer, it’s better from a confidentiality perspective. Not the case. It’s easy to assume that buyers are the weak point in terms of confidentiality. From our experience, the weak link is often internal to the company. As employees start to think a deal is in the works, word can get out. Thus, working directly with a single buyer isn’t a panacea for confidentiality issues.
So how do we respond to an unsolicited offer? First, take a breather. There’s truly no need to rush. Second, start working through a deliberate game plan.
Understand Valuation. If you haven’t gone through a valuation process recently, now is the time to engage in a valuation. We frequently have discussions with owners who feel comfortable that they “know their value.” Twenty years of experience suggest that that is rarely the case. As discussed above, there is usually an asymmetry of knowledge between the buyer and seller. They likely do understand value…. And they aren’t having a discussion with the intent of overpaying. Going through a valuation:
- Solidifies Expectations. We are an M&A firm that also completes hundreds of valuations every year. We get market value. Our goal is to arm you with realistic data that underpins all decisions regarding a sale.
- Understand Implications for Your Estate. So, the value of the company is one part. The other? The rest of your portfolio. For most entrepreneurs, their operating company is the largest piece of the estate. With a realistic valuation – you can work with your financial planner to model what the minimum required yield on a transaction is to support your retirement goals. Numbers don’t add up? We now know that a sale discussion doesn’t make sense as there is more work to do.
- Roadmap for Value Growth. At the foundation of every good valuation is an assessment of the risk profile of a company. The outcome of a valuation obviously answers “what’s it worth?” But it also should serve as a roadmap for what attributes are driving value in your company and what are impediments. If a sale isn’t in the cards, then using a valuation as the roadmap for value growth is the obvious next step.
Assemble a Team. At this point let’s assume that you confidently understand your company’s value. You are ready to proceed ahead with discussions. It’s time to assemble a team. Every good deal team is comprised of, at a minimum:
- Investment Banker / Intermediary
- M&A Attorney (i.e. not a generalist).
- Wealth Manager / Financial Planner
These four individuals will work together to properly position the company and negotiate the deal (Banker), help assure the legal framework is sufficient (Transaction Attorney), diligence responses are adequately addressed (CPA), and that the deal makes sense from the picture of your broader portfolio (Wealth Manager).
Run the Company. Whatever you do, you cannot “take your foot off the gas.” A transaction is a big effort and it’s easy to get distracted. However, buyers are purchasing the future, not the past. Any falter in performance whilst in the midst of a deal and you absolutely can expect to get re-priced. And if not re-priced, certainly some level of risk shifted into an earn out. So, from the moment you entertain the decision of a sale to the day of closing, be sure to keep absolute focus on running the company as if you are going to keep it.
In most cases an unsolicited offer is only good for one party: the buyer. There’s countless advantages from their side of the table, and truly very few on yours. There are exceptions: is this a “fire sale?” Go for it. Apple or Google knocking on your door? You should probably listen. Is the buyer a major strategic that could potentially put you out of business if they go another direction? Take the call. But in all likelihood, if the buyer is a private equity group, a search fund, or a small to mid-sized strategic, your best outcome is probably a well-defined auction process bid amongst multiple buyers.
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