February 25, 2020 //
In the previous article, we looked at how to evaluate an unsolicited offer. Here, we examine the pros and cons of a single offer and discuss how to proceed.
Common thinking says a single offer is ideal if you’re the buyer, while multiple offers are better if you’re the seller. But is that really true? Let’s look more closely at the pros and cons of receiving a single, unsolicited offer.
So, while competitive bids often work to the seller’s advantage, there are many situations were a single offer is easier and more appropriate. Having established that an unsolicited offer may be worthwhile, how should you respond?
Treat any offer as a compliment and respond graciously. Whether you are interested right now or not, assume you will encounter those people again, as potential acquirers, business partners, referrers, or sources of needed capital.
Once you have assessed the offer and done some due diligence on the buyer, your options are to:
Decline the offer. If the timing, price, terms, or acquirer mean you aren’t interested under any circumstance, clearly say so while expressing appreciation for their inquiry.
Postpone the discussion. If you would potentially consider a sale, but for business or personal reasons this is not the right time, reply that you’d be open to a discussion in some specified point in the future.
Negotiate with the potential buyer. If the fit is good, the acquirer attractive, and the offer welcome, you may wish to proceed directly to negotiation. But even if you are eager, it’s best to reply with caution. Don’t sign an LOI or get too deeply into discussions of terms without input from an investment banker or M&A advisor. It’s important to be guarded with proprietary company information and avoid backing yourself into any commitments regarding deal terms. Many unsolicited offers are from serial acquirers, so its safest to assume that they are the more experienced party and making a low-end offer.
Initiate a limited sale process. If the timing and offer are generally attractive, but you suspect the price may be low, you might discreetly ask a handful of other companies to consider making a competing bid. This can be handled quickly and quietly, without officially putting your company up for sale. But watch out for any exclusivity provision which could void the original offer if you talk to other parties.
Initiate a comprehensive sale process. If you decide, as a result of the offer, to officially put your company up for sale, it triggers the start of a larger process. Your financial advisers would then prepare a descriptive investment memorandum and approach a targeted list of potential acquirers. Interested parties would meet with senior management and begin preliminary due diligence prior to issuing a formal LOI and joining the bidding process. Your advisors would help manage the sharing of due diligence information, evaluate bid pricing, terms, and overall fit, and assist in negotiating a final purchase agreement with the successful suitor. This process involves the most time, expense, and potential publicity, but is also likely to generate the best price and deal terms.
Typically, buyers have acquired many businesses, while sellers of privately-owned companies lack this depth of experience. The asymmetry puts sellers at a disadvantage, making it essential to assemble a strong advisory team if pursuing any of the latter three responses. Key players include your: investment banker or M&A advisor; M&A transaction attorney; tax accountant; and personal wealth advisor.
Investment bankers and M&A advisors work with clients to develop a sales strategy, define and manage the overall process, and handle conversations with potential acquirers. They also provide “nuts and bolts” support at each stage of a sale, including:
M&A transaction attorneys are responsible for preparing the purchase agreement. These complex, detailed contracts capture the substantive terms of the transaction, and seek to protect both parties’ legal interests. An experienced attorney is essential to safeguarding a seller’s financial well-being over the long term. Tax accountants help navigate complicated tax laws and evaluate the financial implications of different deal structures. Personal wealth advisors, while not part of the core deal team, can be instrumental in helping clients to protect and deploy gains realized from the sale. For many owners, the sale of their business is the largest financial decision of their lives. We don’t recommend a DIY approach.
An unsolicited offer can be a catalyst for important soul searching and decision making. With some advance thinking, you will be in a position to respond wisely when this opportunity knocks.