Insights

Unsolicited Offer Pros, Cons and Next Steps

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.

Pros and Cons of a Single Offer

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.

Cons:

  • Buyer drives the discussion and timing. By initiating the process, the buyer frames the narrative around what makes the target company valuable, and how much it is worth. It also controls timing in two important ways. Firstly, it thrusts the seller into a major decision that might be better made at a different point in the business cycle. Or when an improvement or strategic initiative is further along. Or when the owner is closer to retirement. Secondly, the buyer is seldom motivated to move quickly through due diligence or negotiations without other potential acquirers in the mix, jostling for position.
  • Seller will never know if they got the best deal. And since unsolicited offers are often low, there is adequate reason to suspect that the seller might have done better.
  • It is harder for a seller to say “no” to pricing changes or harsh terms without a clear alternative buyer. And such issues may be more likely. Knowing they are the only option frees buyers to act more opportunistically than they might in a competitive bidding situation.

Pros:

  • The seller’s upfront investment is lower. Preparing to put a business up for sale demands significant time and resources. Information books. Quality of earnings tests and other financial proof points. Internal upgrades. Meetings with investment bankers and potential buyers. An unsolicited offer allows the seller to bypass all that.
  • When the fit is exceptional and there are few alternative buyers, a single offer can make a lot of sense. For unique or niche businesses where the natural acquirer is clear, a competitive selling process may not yield better results.
  • When a company’s market valuation is easily calculated and highly standard – e.g., lease portfolios, financial assets, franchise operations – a competitive process won’t materially change either the offer price or deal terms. In cases like this, a single offer is simple and efficient.

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?

Potential Responses

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 it
  • Postpone the discussion
  • Negotiate with the potential buyer
  • Initiate a limited sale process
  • Initiate a comprehensive sale process

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.

Assembling Your Advisory Team

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:

  • Valuing the target business
  • Creating the investment memorandum
  • Identifying and contacting potential acquirers
  • Managing the content and flow of due diligence information
  • Assessing competing offers
  • Negotiating final deal pricing and terms

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.