You’ve Received an Unsolicited Offer for Your Company — Now What?
Written by Chris Larmer & Brent Cunningham
REPRINTED WITH PERMISSION
We’re seeing it happen more and more recently, a strategic buyer or a private equity group directly contacts the owner of a business and wants to buy their company. For many business owners, this seems like a dream come true. They think “a company that I don’t even know wants to buy my company and the valuation they’re talking about sounds great”.
Why the recent surge in unsolicited offers?
There are two contributing factors: (i) Corporations have more cash on their balance sheets as a proportion of total assets since the 1960s; and (ii) Private equity firms have more than $1 trillion in dry powder — cash that must be deployed in advance of its ‘best before’ date — the date when the money must be returned to the private equity fund’s investors. In other words, there is an ocean of money out there looking for return and where better to find return than acquiring a good company?
So, whether you’re interested to sell or looking to buy, be assured your company is on someone’s radar.
Even if you’re a few years away from selling, it’s important to note that a recent study of succession trends by UBS, the bank, found that about 50% of business owners exit not because they want to sell, but because they have to sell, and a leading catalyst of the ‘have to sells’ was an unsolicited offer.
So, what should you do when you receive that call?
Until you get the call from the unsolicited buyer, you imagine that your normal, rational, decision-making self will handle the situation in the same pragmatic way that you’ve managed all the other big decisions that have got you to where you are today. Granted it is flattering to visualize the monetized value the party has offered for your lifelong investment. But is what you think you see in the offer what you will really get in your pocket? Could you get a significant amount more if there were other interested buyers at the table?
Stated another way, there are two issues working against you: (1) You only have one interested buyer; and (2) You are thinking that you can save some money by going ahead with this on your own.
Issue #1: When you have one buyer, you have no buyers.
The companies that will approach you are the “bigger fish” in the food chain and are experienced professionals in acquiring companies like yours. After you’ve been enticed to sign an exclusive LOI (letter of intent), the pressure is dialed up in their favour because you’ve surrendered all of your negotiating leverage. You feel outmatched and you may even want out of the deal, yet the prospect of the sale collapsing is a burden that you, acting alone, cannot withstand on a repeated basis. This often leads to capitulation to the buyer’s demands. What demands? For a start, working capital — how much stays with the business after the sale? In our experience, very few people, advisors included, can accurately determine and defend the correct amount of working capital to be included in the sale. Failing to do so correctly can cost you hundreds of thousands if not millions of dollars.
What else? Maybe it turns out that the attractive initial price included a lot of bells and whistles such as large and extended earn-outs (the realization of which is based on dubious metrics that will be derived from accounting that they will control after the sale), vendor take-back notes, extended employment contracts that keep you in your current capacity for several years — the list goes on an on.
It may be worth asking yourself “If this group is interested in buying my company, who else might be?” The main reason most business owners don’t go there is because they worry it will scare their buyer away. Evidence, however, does not support that line of thinking. If your buyer would walk away because of the presence of other interested buyers, your buyer is probably not willing to buy your company for market value. Perhaps another reason business owners don’t go there is because they can’t imagine who other interested buyers might be. The reality is there are likely multiple buyers that would be interested in buying your company, you just don’t know how to find them. Besides, how would you approach them if you did? In each of our engagements, we’ve identified and reached out to hundreds of potential strategic buyers globally and we solicit about 2,000 private equity firms as well. However, there is more to it than finding buyers — preserving confidentiality, attracting interest, timing disclosure of sensitive information, obtaining multiple LOIs, negotiating the most favourable terms, and closing the sale are all things that lead to a successful outcome.
Issue #2: You’re thinking of going it alone.
When sellers act alone in the sale of their businesses, more than 50 out of every 100 business sales collapse and fail to close. Some of the causes might be: (i) the buyer’s deliberate act of not clearly articulating their intentions in the LOI, (ii) some key facts about the business were not disclosed by you early enough in the process, (iii) some key employees thwarted the process, (iv) the transition of material relationships with third-parties were improperly handled, etc.
More importantly, however, you as the owner have a huge financial stake in the outcome of the transaction. Like others acting alone, your emotional attachment to the outcome does not afford you the objectivity during negotiations to clearly comprehend the effect of what the buyer is proposing nor how to advance your position. Beyond negotiation of the LOI, the litany of issues you will face when the buyer and their advisors dig deep in their due diligence will evoke strong emotional desires to satisfy yourself in ways that are inconsistent with what you believe you should do. Not to mention you still have a business to run, the value of which is likely eroding as you continue to struggle with the transaction. Too often the instinct of the seller acting alone succumbs to the pressure imposed by the skill of the other side. The seller’s lack of knowing what is normal or what is ‘market’ makes decision making difficult since there is no frame of reference for what is or should be acceptable. This causes the distressed seller to look for a quick close — they see a small light at the end of the tunnel and want to get the transaction over quickly. Invariably, the quick decision surrenders monetary value along with many other important terms which could have been preserved through objective negotiations. Speed kills.
What owners need is a lightning rod — they need a seasoned M&A team on their side that is trained to be “committed yet unattached” to the transaction’s success. Smart negotiators know that being cornered into making decisions while at the table with the other side is costly. Deferring a conclusive position to people away from the table (i.e. you, the principal) avoids being pinned down thereby enabling effective out-of-the-box problem solving while achieving a more favourable end result. Having this buffer during the sale process also enables the buyer and seller to maintain an amicable working relationship after the transaction has closed.
Selling a business is a complex mix of critical actions: guarding confidentiality, engaging key employees at critical junctures, precisely timing the release of information, selling strategic value, negotiating to balance the interests of the seller and the success of the deal, among many others. The situation’s importance is compounded by the fact that when a company goes on the market and the sale doesn’t close, it becomes “damaged goods”. Typically this causes your company’s market appeal to diminish and therefore its market value to remain depressed for many years to come. With no second chance, getting it right the first time is paramount.
When thinking of going it alone, remember — independent studies have shown that sellers that did not engage a professional M&A team ended up with 30% less for the sale of their business. Why? The answer lies in the maxim “Whenever you create competition for something you possess, the possession increases in value.” Wading alone into uncharted waters is dangerous and extremely expensive.
Chris or Brent can be contacted at (604) 736-3325.
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