Process of Responding to Unsolicited Offers
There is a lot written about the strategies around successfully selling one’s business in an auction process. This is where we would market the business for sale in the open market hoping to get multiple offers.
While an auction is a great strategy to get the highest price and best terms, it is common for potential purchasers to contact a potential target directly. It is exciting and flattering to get the call, but how you handle the process can make a big difference in the outcome. In our last blog post on unsolicited offers, we wrote about factors to consider and evaluate in deciding whether or not to move forward with an unsolicited offer.
If you decide to seriously engage in discussions and negotiations with an unsolicited offer, our core advice is to find a way to achieve some control over the process. That is, create a structure for the process. This will give you the best chance to get a fair price and good deal terms. While every situation is different, there are certain things that you should be aware of.
Who is the purchaser?
- Who is the purchaser? Sometimes you might be contacted directly by a purchaser, but at other times the purchaser has hired an outside consultant to represent them in a buy-side search. You might also be approached by a consultant that is looking to represent you in a sale. While it might be obvious, sometimes it is hard to tell who the contact is representing.
- Private equity platforms. They are usually competitors owned by private equity firms that purchase a business in your industry as a platform then bolt on similar businesses. This creates scale and synergies which they hope will ultimately lead to a higher sale price when they look to exit in 4 to 7 years.
- Financial Investors. These are typically family offices, high net worth individuals or smaller private equity buyers that want to make a direct investment. They are looking for investments that will provide a return and they generally have a plan to sell the business, but generally over a much longer time horizon.
- Strategic Purchasers. This is usually a competitor, supplier or someone that has a complementary product or service within the same industry. The strategic purchaser wants to grow and has determined that the return is better if they acquire competitors in addition to growing organically. The strategic purchaser understands the risks, opportunities and may be able to introduce synergies that increase the profit of the acquired business. Their goal is generally not focused on an acquisition quickly followed by a sale.
Each of these groups ultimately want you to sell the business to them or someone they represent, but their motivations are different.
Regardless of who the purchaser is, you need to understand that they are likely very familiar with the M&A process which can lead to an advantage in negotiations and outcomes whether it’s price or terms. To level the playing field, it’s important to prepare yourself both mentally and organizationally in order to maximize value at the best terms.
Know Your Value
It is always a good idea to know the value of your business. This will help you gauge whether the price you are offered is fair and gives you a basis to negotiate a higher price. Chartered Business Valuators (CBV’s) are well positioned to advise on and produce a formal business valuation or pricing analysis.
Control the Process
To give you the best chance to negotiate a fair price and good terms you need to exert some control over the process. Every deal is different, so if you’re not experienced in selling a business it is a good idea to engage financial and legal advisors who have demonstrated experience in M&A as a part of your deal team. We have summarized some potential process steps as follows.
The obvious first step in the process is when the potential purchaser contacts you. If you’re interested in discussions, we suggest that both parties sign a non-disclosure agreement (NDA) to protect their interests. Depending on the purchaser, NDA negotiations can sometimes indicate how the parties will handle future negotiations. Once an NDA is signed, the next step would be to arrange a short meeting to talk about the opportunity and if possible, share general information regarding the business, including scale and profitability. The objective of this initial meeting is to assess fit.
Based on this initial discussion, we would advise that you request that the purchaser provide a high-level price range that they are willing to pay. If their pricing is within range of your expectations, then it makes sense to continue discussions further.
Timeline and milestones
We recommend that both parties agree to a process including a timeline with milestones that will trigger continuation or termination of the process. This will keep everyone focused and on track.
Sharing of Information and Due Diligence
Once timelines and milestones have been established, the next step is to work towards an informed offer in the form of a letter of intent (LOI). The purchaser will generally provide a list of information they would like to see. It is important to assess what financial and operational information is appropriate to share at this early stage of the process, especially proprietary or customer information. With that said, you must provide enough information that a potential purchaser can provide a meaningful offer. Your advisors can provide guidance on what is appropriate to share at this time. In our experience, providing a concise information package is effective in facilitating a purchaser’s due diligence. It is important to provide sufficient information such that the purchaser understands the aspects of the business that would impact their interest and pricing. This would also include several discussions with management.
Letter of Intent
After the purchaser has reviewed the information provided to date, the next step is to negotiate an LOI. While there are different approaches to this, we prefer that the LOI contains most if not all the provisions that will materially impact the deal including both business and legal terms. It can be helpful if the parties agree in advance what should be included in the document. While the LOI is not binding (i.e., legally enforceable) on the parties, it will serve as the basis for the actual sale agreement.
Confirmatory Due Diligence and Purchase and Sale Agreement
At this point there is still lots of work to do, but the price and business terms should effectively have been finalized. Next steps would include confirmatory due diligence where the purchaser validates the information provided thus far by reviewing supporting documentation, followed by corporate record and tax information review and the drafting of the purchase and sale agreement. We cannot stress enough the value of a good M&A Lawyer.
The drafting of the share purchase agreement is a time consuming and critical part of the process. The involvement of your legal and advisory team is critical to get the deal over the finish line.
Please keep in mind that this is a limited list of considerations when undertaking a sales process. There are a number of other factors such as tax, personnel and regulatory considerations which may also have to be dealt with.
Selling a business is a complex process with lots of interconnected steps. Unsolicited offers can help you by-pass the process of finding a purchaser, but it still requires lots of work to achieve optimal results.
At Smythe Advisory we specialize in valuing businesses and managing M&A processes. If you have any questions, please contact a member of the Smythe Advisory team below.