How to Respond to an Unsolicited Offer

In today’s market, investors are aggressively looking for investment opportunities and businesses are looking to expand through strategic acquisitions.

As a business owner, you may have been on the receiving end of an unsolicited inquiry asking if you are interested in selling your business. In most cases, these unsolicited inquiries don’t go anywhere because the owner is not interested, but what should you do if selling your business is a possibility?

IS THE TIMING RIGHT?

Every business owner needs to execute a succession plan at some point – the question is when? If the unsolicited inquiry piques your interest, the first step is to stop and reflect on your goals. The sale process is marathon, not a sprint, so do not feel rushed into making a decision.

Take time to reflect on what piques your interest. Given your specific personal, family, financial and business circumstances, it is good to ask if this the right time to sell or is this the trigger to start long-term succession planning? Is there something special about this purchaser that you want to explore? What are the financial and non-financial objectives that you want to achieve through the business sale?

If this is the first time you have seriously considered selling, odds are that this isn’t the right time for you. Most business owners have spent decades building their business and it is part of their identity. Selling your business is a psychological and emotional process that most business owners need time to mentally prepare for. Once you start down the sale road, it can be difficult to turn back, so make sure you are ready.

Even if you decide that this isn’t the right time to sell, do not let the opportunity go to waste. Use this as the catalyst to start developing your long-term succession plan. Working on a succession plan a few years in advance will allow you to keep your options open and increase the likelihood of a successful retirement.

EVALUATE YOUR OPTIONS

If you decide the time is right to sell, the next question is to decide how to proceed. Do you explore the opportunity with the inquirer or do you cast a wider net?

The right option for you will ultimately depend on the specifics of your business, your personal goals and the fit of the original party. In general, your options are:

• To engage in discussions with the original party before looking at other possible purchasers

This option is most appropriate if you have a specialized business with a small pool of potential purchasers and you already have a strong relationship with the party. In this situation, strategic fit is likely the most important consideration when selling your business. Due to the unique nature of your business, it is unlikely you would receive a reasonable offer from parties that do not have the right strategic fit. Based on your existing relationship with the party, you trust they will put forth a fair and reasonable offer.

A significant drawback from this option is the loss of negotiating power. Without talking to other parties, you will not know if you could have received a better deal from someone else and the purchaser doesn’t have the threat of other bidders to keep them honest. If there is a chance that you may second guess the offer and wonder what other deals are possible, then this option is not for you.

• To engage in discussions with the original party while also reaching out to a small group of other possible purchasers

Similar to above, this option is appropriate if you have a specialized business with a small pool of potential purchasers, but you do not have a strong relationship with the party or any other obvious purchaser. The strategic fit will again be the most important consideration in receiving the best offer.

However, in this situation, because you do not have a strong relationship with an obvious purchaser, you are not convinced which party would put forth the best offer. If you only talk to the original party, you will second guess whether their offer was fair.

Under this option, you will continue discussions with the original party, but you will also engage with other businesses that you think will be a strategic fit. By reaching out to multiple parties, you will have a better understanding of the market’s view of your business and the potential purchasers know they must put forth a strong offer since they are competing with other bidders.

• Begin a full business sale process

This option is the most appropriate if your business will be attractive to a wide pool of potential purchasers and you seek to maximize the offers you receive.

In today’s market, there is a strong demand for businesses that have demonstrated consistent earnings over $1 million EBITDA and have a strong management succession plan in place. Regardless of the industry, if your business has these two characteristics, it is likely the potential purchaser pool is larger than you think.

Under this option, you would cast a wide net to solicit offers for your business. You would look to engage with both businesses that could be strategic fits and financial investors that may have no existing connection to the industry. The benefit of this option is that you will have the opportunity to evaluate every possible offer for your business, as you will have engaged with all the possible purchasers. The goal is to receive multiple offers, which will allow you to select the offer that is best aligned with your goals.

HAVE A NEGOTIATING STRATEGY

As the business owner, you control the flow of information and interpretation of that information. Do not simply provide the potential purchaser with the information they request without having a strategy in place first. This strategy should include maintaining control and confidentiality of your information, controlling the pace of negotiations and maximizing your negotiating leverage.

Even the most straight-forward business is complex with many nuances. When reviewing financial and operational information, what may seem obvious to you is likely open to misinterpretation by someone not connected to the business. When you provide information about your business, it is important to add context to the information, so you control how it is interpreted. If you are undertaking a full sale process, this will be provided in the form of a confidential information memorandum (CIM). If you are only engaging with one party that you trust, this may be simplified into a short memo. Either way, you should not provide financial statements and other information without setting the context first.

Regardless of which sale option you choose, the overall negotiating strategy is the same. You want to maintain the negotiating power and keep the purchaser honest by making it clear that you will not sell the business if you don’t think the offer is fair. This is typically accomplished in one of two ways: (1) having multiple potential purchasers at the table; or (2) being able to credibly say that you are willing to walk away from the sale.

Successful negotiations are built on trust between the parties and maintaining your credibility is key. This starts by having a solid understanding of the value of your business and market conditions. You need to put yourself in the shoes of a purchaser to understand the value they see in your business. Once you understand how the market views your business, you can develop reasonable negotiating positions and confidently stand behind them. Negotiations can break-down when one party makes unreasonable demands and the other side calls their bluff.

Depending on your situation, there are differing strategies that can be used to maximize the likelihood of achieving your goals from the sale of your business. If you are considering the sale of your business, contact one of Smythe Advisory’s transaction advisors to see how we can help you achieve your goals.