Everybody feels good when they receive a compliment and business owners are certainly not immune. One of the highest compliments for a business owner is to receive an unexpected invitation from a well-respected or well-known company to propose acquiring them. Isn’t this a clear indication that they are doing well, as surely, they would otherwise, not receive such an uninvited offer?
Forget Visions of Sandy Beaches
Despite the fact it is very easy to get drawn in, the truth is, one should be extremely cautious about spending too much time appraising unexpected offers. Business owners can, of course, test such potential suitors as a sounding board to assess what their market valuation might be or, in rare cases, they may offer a high price for your business and may even prove to be the proverbial “white knight”.
In such situations, visions of white sand and blue seas seem far more attractive than continuing with 12-hour work days, battling on a daily basis to win new customers and consistently being the driving force that keeps your team motivated. However, visions of abundant leisure time should be set aside, as should the popping of champagne corks. A reality check is needed - Fast!
But why not explore further? After all, it could potentially be a good offer and you never know for certain what an unsolicited offer will bring. However, it is typically not an offer, rather an invitation to begin a conversation. What you should be aware of are the following:
- It will be a considerable time with significant costs before a tangible offer is made.
- It will also take up valuable management time and it’s possible your core business will be
disrupted. In addition, it is necessary, at all costs, to ensure this unexpected interest doesn’t become public knowledge within your company, as this could unsettle staff and have a serious impact on the business
Compliments will flow but hold the Champagne!
A real offer will take some time to materialize; the potential buyer will be amiable and full of praise for your business and its possible value. However, in order to establish the real value, the buyer will require more information. Logical, of course; however, once you have provided the first set of information, which is easy enough to handle yourself, from then on, the task immediately becomes more demanding; in the next round of information exchange, you may already have to include your CFO.
We all know that everything has its price so, if someone comes along with an amazing offer, then you should pay attention, but, at the same time, you should be aware of the risk that the interested party may well determine the entire sales process and associated time frames. If you receive an unsolicited offer on the house you own, whether you are interested or not is simple - You know the prices of similar houses in the area and you know your own/and your partner’s appetite for being interested; the same cannot be said of selling a business.
Prepare for Your Sale and Increase Your Equity Value
There are many aspects of a business that can be optimized for a sale, which will increase your equity value. Without the proper preparation and ability to present the true value for any buyer, the chances are high that you will be confronted with a bargain seeker who may have sent out many unsolicited offers in order to seek out good deals. Such approaches could merely be a “fishing trip”, the wrong response to which could also get into the hands of your major competitors.
So, what should you do if such an invitation comes your way, which you do want to explore? First of all, before any discussion, ensure you have a signed Non-Disclosure or Confidentiality Agreement in place.
Involve Your M&A Advisor Early in the Process
If you have an M&A Advisor, then make sure they are involved in the early stages. They can help you to determine whether a bidder is serious and whether selling now is in your best interests. The role of the M&A Advisor is also to help you ascertain how best to position yourself in the market to achieve your highest ROI.
Your business value: Unless you understand your company’s value in the current market, you can’t possibly decide whether a bid is fair (though it probably isn’t, since such opportunistic buyers are generally looking for a bargain). An M&A Advisor with a good understanding of your industry and technology can help you to analyse the value drivers within your business and, in the case of a strategic buyer, help you to identify and articulate the value your business offers the buyer.
The buyer’s strategy: Is the buyer a financial buyer, looking to consolidate an industry sector? Is it a technology purchase, aiming to acquire the talent in your company? - Or something else? Another aspect is the experience of the unsolicited buyer. Is this their first acquisition, how many others have they made, what were the valuations they used for previous acquisitions? The answer to each of these questions may have a significant impact on the valuation. If the knock on your door is from a strategic buyer, then it is imperative you quickly determine the buyer’s motivation.
Buyer’s ability to purchase: To ensure an unsolicited buyer can back up their offer, your M&A advisor will find out how they are capitalized. Is it based on debt, what is their level of profit and cash flow generation, the quality and personalities of the management team and the cultural fit, etc.? If they require financing for the transaction, are the funds readily available or do they plan to secure funding once the valuation is agreed.
History: A buyer might have a history of trying to snap up businesses cheaply or perhaps even through hostile takeovers. There are myriad scenarios. In short, you need an understanding of their reputation in the market, from trusted sources. No buyer can make a serious, unsolicited offer without having access to some key data.
It is not difficult to:
- Provide a balance sheet and P&L for the last 3 years
- Include your current FYE and next year’s planned budget and forecast
- Overview of the organization (No names)
- Products/Services overview
Once the buyer has this information and you have had answers to all the questions raised above, with regard to the buyer’s credibility, you will also want to determine what the valuation is that you would accept as your purchase price and present that to the buyer. This is where your M&A Advisor plays an important role. They can explain the strategy you have for the business and the hidden value that is included in achieving this plan. All of which should be factored into the valuation.
Your M&A Advisor can articulate the Value of your Strategy
In other words, “If, dear buyer, you are interested in us, then you have to consider these growth plans and include them in the valuation.” You can share your valuation with them but we typically advise our clients to ask for an indicative offer which takes your strategy into account. After all, they took the initiative to make the approach, so they should have a figure in mind.
A documented offer (LOI) including the process, timeline etc. must be in place before any further due diligence can be scheduled or accepted. Also, make clear that after the initial and typically congenial conversations/meetings in the early phase, all communication will take place via your M&A Advisor. This puts a buffer between you and the potential buyer, who otherwise may cause too much distraction with additional questions.
An Experienced M&A Advisor Ensures Confidentiality
Your M&A Advisor must be able to first get a serious and relatively acceptable LOI on the table to make it worth your while becoming involved. An M&A Advisor can instruct the buyer that if the LOI is not attractive enough, it may trigger a round among other potentially interested buyers. This is something you might consider anyway, if you have not agreed a period of exclusivity, and it will help you to gauge how attractive such an offer is. An M&A Advisor who understands your business well can get a clear indication within 4-6 weeks, whilst ensuring the details remain confidential.
In this way, business owners, as well as publicly listed companies, can avoid making costly mistakes. Once a complimentary invitation to begin discussions has been made, it’s all too easy to make the mistake of dedicating most of your time to selling your business rather than continuing to run it.
Losing focus on your business can spell disaster
Many companies that become involved in the process of being acquired lose focus on their day- to-day operations. In many cases, these businesses suffer from a significant business downturn. Further, if the acquisition does not materialize, their business has lost value rather than gaining value during the process. In privately held companies, the business owner already wears many hats and is deeply involved in many aspects of the organisation. In this scenario, the lure of sandy beaches, prompted by the unsolicited offer to buy the business, may well end in burn- out.
Control the process yourself
However, this doesn’t happen if you decide when to sell your business as, in that case, you control the entire process. You can then take the time to prepare properly, ensuring that all aspects of your business are fine-tuned, under control and appropriately documented. An M&A advisor with in-depth knowledge of your products & solutions and the dynamics of your market can guide you on the right time to sell, articulate the true value proposition of your business and qualify the right buyer.
Unsolicited offers typically end in short-cuts to parts of the sale process, which are generally only beneficial to the quick-thinking buyer.
by Geert Kruiter
Document Boss
