In a perfect world, your preferred handpicked buyer would come knocking exactly when you are ready to transition your business to its next (ideal) owner. And this knocking would occur precisely when you have all of the I’s dotted and T’s crossed – say nothing of having your performance on an upward trajectory and your industry in favor.
But the reality is this rarely happens. Depending on the type and size of the company you operate, you may get inquiries from time to time from competitors, private equity firms and/or search fund investors. With a great deal of capital yet to be deployed, acquirers cast a wide net to canvass the landscape of opportunities, but what should you do when outreach efforts turn into legitimate expressions of interests?
The receipt of an unsolicited offer to purchase your business can be a heady experience – equal parts invigorating and stress-inducing. After all, the opportunity at hand is involving your livelihood, your source of income (both present and future), and in many ways, your legacy. The decision to sell your proverbial “baby” is often multi-faceted, so it pays to approach unanticipated opportunities in a balanced and rationale manner.
To help ensure these situations are handled well and taken in consideration of all important constituents (e.g. partners, other shareholders, key employees, and family members – all told, the stakeholders), we have outlined the following considerations:
- Resist the urge to rush: Often growth through acquisition is a business line for many suitors. They are prepared and have run numerous processes before. It is important to understand the pace you are able to run while not losing sight of what’s most important – running your business well. Do not let a buyer’s urgency or timetable compromise your ability to make a thoughtful decision.
- Take time to get informed: If inclined to engage with a potential buyer, there are many things you can discuss before really diving into your business. First and foremost, it is critical to understand the legitimacy of the offer and the party involved. Carve out time to research their background, how long they have been in business, who their shareholders are, their transaction history. It is not out of bounds to ask politely about their financial and operational capacity to execute on their proposal. Do they have a vision and a strategy for integrating your people and your customers? By engaging in a dialogue as much about them as you, many important qualities can be gleaned about their sincerity, philosophies, cultural fit, etc.
- Reassess goals and objectives: It is important to not lose sight of your personal situation in the midst of this process. Are you still in the early stages of your growth plan? Do you have a handle on what your next chapter looks like? Is retirement the goal, and if so, will you have what you need and want? Given that running your business is as much a lifestyle as it is a vocation, it is imperative to think long-term about how your life will change and being comfortable with that change.
- Understand your value: Preferably, you have invested in some level of valuation analysis prior to this opportunity to provide you with a baseline understanding of your company’s worth. If not, it makes sense to pursue a business valuation to understand a likely range of value for your company based on an assessment of earnings capacity, asset/liability composition, growth opportunities and risk profile. Note that value can be interpreted differently depending on a party’s unique ability to drive cost savings and synergies, but it is critical not to simply rely on rule of thumb valuation metrics or anecdotal stories of transaction multiples. Having a grounded, and informed sense of value can reduce the risk of leaving money on the table or running into one of the larger transaction impediments – disconnects in valuation expectations.
- Manage confidentiality: Engaging in topside conversations about general business is fine, but be thoughtful about sharing any secret sauce regarding key intellectual property, trade secrets, process know-how until you are fully covered by a confidentiality and non-solicitation agreement. The agreements should be reviewed by your attorney before signing to ensure the proper language and terms are in place. Delving into customer details and more granular sales trends should similarly be avoided until the appropriate stage of discussions. Managing confidentially extends beyond the direct dialogue with your suitor to that of your employees, competition, and general marketplace. Knowledge of deal conversations should be managed and limited to avoid potential damaging water cooler talk or unnecessary speculation about your independence.
- Determine needed support: In the instance we are discussing, the buyer is on offense. They are undoubtedly prepared from a staffing, analytics, accounting and legal standpoint. You need to make sure you are adequately supported as well. At a minimum, it is advisable to retain and collaborate with a CPA, transaction-specific attorney and an M&A advisor. Having a team around you will assist in structuring the most tax sensitive deal, evaluating market terms and provisions, and maintain constructive negotiating dialogue (among other activities). The goal is to enter into a new partnership with a buyer on the most amicable and constructive basis possible and your team can help serve as a buffer and relationship liaison.
- Understand negotiating dynamics: If engaging with a potential purchaser making unsolicited offer, it is important to understand they are the only show in town. You know it and they know it. This may be ok, but it also presents a situation where you lack alternatives to push back, especially if the buyer starts to show signs of wanting to re-trade the deal they proposed. That said, you control the ultimate decision, which is whether to say “yes” or “no.” You should never lose sight of this optionality, but it is also key to understand some of the limitations of not having any competition involved in the process.
- Do not focus just on price: It is easy and understandable to fixate on the deal value. After all, the proceeds represent the culmination of your hard work and sacrifice. However, a price may not be as it appears if you do not equally focus on terms. How much money is in cash versus another form of consideration? What gets delivered at the transaction closing? How straight forward will it be to measure, and capture, contingent value (e.g. an earnout). Other deal structure considerations include the language and protections around the representations and warranties you make, the indemnification you provide, and the various provisions of employment and non-compete agreements. Taking time to prudently negotiate the various deal terms is an investment well worth making both from an economic and risk management perspective.
- Evaluate alternatives: An unprompted offer should not obscure the need to fully weigh other options you have for your business. You may still love what you do and have no desire to move on from your passion. It makes sense to evaluate your comfort and opportunities of remaining independent versus the alternatives. While the offer on the table may be compelling, it should be considered against other strategic alternatives, such as growing organically, raising growth capital, partnerships or joint ventures, or internal transfer options to other key employees, family members or ESOPs.
While the above is meant to outline a how to manage receiving an unsolicited offer, there is also a lot to be said about trusting your instincts. Chances are, if you are receiving outside interest in your business, both your business acumen and your gut, are reasons why.
Managing Director
Baldwin & Clarke Corporate Finance, LLC
Email: peter@baldwinclarke.com
