Most business owners receive numerous unsolicited offers to buy their company every year. Your initial response and the path you choose for the sale will set the stage for the value you receive for your business when you do sell it.
Have you received a phone call, email, or letter from someone expressing an interest in buying your company, even though the company isn’t for sale? That is what we call an “unsolicited offer.”
Most business owners receive numerous unsolicited offers to buy their company every year. These unsolicited offers, which are really just unsolicited inquiries, can be flattering and may get you thinking about selling your business. But you need to be thoughtful in how you respond to the inquiry. Your initial response and the path you choose for the sale will set the stage for the value you receive for your business when you do sell it.
When you receive an unsolicited offer, your initial response should be polite (after all, this could be your eventual buyer), but before answering any questions about your company ask them the following questions:
1. What is your position with your company?
2. What does your company do and how does that relate to my company?
3. Why specifically are you interested in my company?
4. What do you hope to achieve through this acquisition?
5. Have you made similar acquisitions?
Through this questioning you will understand the seniority of the person who is contacting you, if the person represents a strategic or financial buyer, if they are targeting your company specifically or just any company in the industry, what they are looking for in an acquisition (e.g. geographic expansion, product line expansion, market share expansion, cost synergies, etc.), and if they are active acquirors or rookies.
They won’t be expecting these questions, and their willingness to answer them will give you a good signal about whether they are a candidate to acquire your company. They will then start to question you about your company, and it is perfectly acceptable to talk about your company, its products, services, markets, etc., but shy away from any information they couldn’t otherwise get on their own. And don’t share your financial information with them, even if they are willing to sign a non-disclosure agreement. They may push for more information, but don’t give in to the pressure.
When you end the communication, let them know you will contact them when the company is for sale. This is polite and easy, and you learned more than they did. Put your notes from the conversation in a “buyer” folder for later reference.
Are You Ready To Sell?
Unsolicited offers usually cause business owners to take a moment to think about whether they are ready to sell their company. Are you interested in selling? If you’re not interested at this time, then continue to run your business and don’t spend too much time worrying about the unsolicited offers you receive. But do start to learn about exit planning and how to increase the value of your business prior to selling. The more time you have to work on those pursuits, the better the outcome you will have when you decide to sell.
Analyzing The Ideal Scenarios
If you are interested in selling, you should review your options for pursuing a sale. But prior to considering how to proceed with the sale, consider the implications of the table below that compares the ideal scenario in a sale for the buyer versus the seller. We won’t explain all of the items in the table, but as you compare the first column to the second, it should be obvious why the buyer or seller prefers each item.
Buyer Ideal Scenario
Seller Ideal Scenario
They are the sole buyer talking to the seller.
Multiple buyers are competing to buy the company.
Seller shares all the information requested by the buyer without filtering.
All information is examined by advisors prior to dissemination, making sure the company puts its best foot forward, creates the right first impression, and doesn’t share sensitive information.
EBITDA is determined by the buyer.
Adjusted EBITDA is determined by the investment bankers working with the internal team.
Valuation given by buyer and expressed as being fair.
While a sale price is never offered to the buyer ahead of time, an expected valuation range is determined internally before going to market.
An inexperienced seller negotiates the sale on their own against an experienced buyer, then brings in legal counsel to document the terms already agreed to.
An experienced team of advisors guides the owner through the sale from start to finish.
Seller focuses only on valuation and accepts any structure proposed by the buyer.
Advisors examine structure and advise seller on alternative structures and how they impact the amount of money the seller will ultimately end up with after taxes.
Buyer controls the timeline, often stretching out the sale process.
Tightly controlled timeline determined by the selling team ensures a timely close.
Seller has no fallback position if negotiations fail or buyer re-trades the deal during diligence.
Seller has multiple buyers ready to buy the company and can pursue an alternate buyer if negotiations fail or the buyer tries to re-trade the deal during diligence.
Decisions To Consider
Now that you have some insight into the ideal scenario desired by buyers versus sellers, you have to make the very important decision about how you are going to proceed with the sale. Your choices are as follows:
1. Handle the sale on your own, and pursue the single unsolicited offer,
2. Pursue the unsolicited offer, but with the right team helping you, or
3. Engage an investment banker to run a full sale process.
1. Handle the sale on your own, and pursue a single unsolicited offer.
Unfortunately, many business owners choose to pursue the sale on their own. You shouldn’t make this mistake. Many business owners find themselves ready to sell when they receive an unsolicited offer, and they often pursue the sale without putting together and consulting their team prior to negotiating the offer. We get it, most business owners are smart and independent people who have achieved great success. But should they really approach what is likely the biggest transaction of their life on their own? The problem is, they are inexperienced in selling a company and they don’t know what they don’t know.
Ask yourself the following questions to evaluate your experience and competency in selling a company:
Do you know how to tell the story of your company and what it offers to buyers? Most business owners are great at talking about their products and services, but don’t have experience telling a compelling story about their company.
Do you know how to examine and restate your financial statements to properly show Adjusted EBITDA? Waypoint Private Capital has NEVER received an accurate Adjusted EBITDA number from a client, but we work with them to get to the right number before presenting it to buyers.
Do you know how your company should be valued? And can you negotiate that valuation against a buyer who has been in hundreds of these negotiations?
What information should you share with the buyer?
How does the structure of the deal impact the timing of the money you receive or the after-tax proceeds?
Have you and your CFO/controller ever examined a preliminary quality of earnings report (QOE) prepared by very experienced CPAs and had success in getting them to change their findings? After all, if they get it wrong, EBITDA and working capital may be negatively impacted, resulting in a lower valuation and higher working capital adjustment.
Can you effectively create competitive tension in the negotiations with the buyer when you have no other buyers competing to buy the company?
By pursuing a sale on your own, you achieve none of the items in the “Seller Ideal Scenario” column in the table above, but allow the buyer to achieve everything in their ideal scenario column. You haven’t created any competition in the sale, so a buyer knows they don’t have to make their most competitive offer for the company. They only have to offer just enough to get you to say “yes.”
One objection we have heard about working with an investment banker on the sale is the fee the banker charges. Sometimes the fee looks big. But, if you are working with an experienced investment banker, the increase in valuation they achieve through running the right sale process will far exceed their fee and you will end up with more money in your pocket after paying their fee than you would have if you hadn’t engaged them.
2. Pursue the unsolicited offer, but with the right team helping you.
The second choice is to bring in the right team to help you pursue a particular unsolicited offer. This path isn’t optimal, but it’s moving in the right direction. If you want to sell properly, you need a team of experienced advisors. That team will include an investment banker (like Waypoint Private Capital) who will be the quarterback of the team, an experienced M&A attorney, a CPA or tax advisor experienced with the nuances of a sale transaction, and a financial advisor. If the unsolicited inquiry you received is from a qualified buyer you would like to sell to, you should engage your team prior to sharing any information with the buyer. The investment banker will help you present the correct Adjusted EBITDA and position the company properly with the potential buyer.
By hiring the investment banker, you are also sending a message to the buyer that they better put forth a competitive offer and deal fairly throughout the sale process or the investment banker will be prepared to pull the opportunity from them and market it to a much broader set of potential buyers. This message can change the behavior of that buyer and make them put forth a strong offer so they don’t lose the opportunity. Following this path allows you to receive the advice and guidance of experienced advisors throughout the process.
You can often negotiate reduced fees with the investment banker (for that specific buyer) because they don’t have to put in as much work preparing and taking the company to market. The only downside to this approach, and it is important and can be very costly, is that by not pursuing an M&A auction process you haven’t created any competition for the buyer or allowed for what we call “outlier offers” that may result in a purchase price that is much higher than the theoretical or fair value for the company (see this article for outlier offer examples we have experienced).
3. Engage an investment banker to run a full sale process.
The best choice for selling your company when you receive an unsolicited inquiry / offer is to contact an investment banker such as Waypoint Private Capital to start the sale process. After exchanging some initial information, they should be able to provide you with a free and confidential valuation estimate. If that estimate is in line with your expectations, engage the investment banker to sell your company. They will fully prepare the marketing materials and financial model prior to contacting any buyers, then conduct an M&A auction process (see detailed video of the auction process) that introduces the sale opportunity to all potential buyers you have approved. Any buyers who have already expressed interest in buying the company through an unsolicited offer will be included in the buyer list. This process creates a competitive situation amongst not only the buyer who sent the unsolicited offer, but all other potential buyers the investment banker chooses to contact.
This sale process takes the time to make sure all buyers are fully informed about the company they are pursuing. Then two or more rounds of offers are coordinated to come in at the same time on a specific deadline. All offers are only seen by you and your team, so the buyers don’t know how many other competing buyers are in the mix or what they are offering. This creates a competitive tension that results in superior offers being submitted. These “indications of interest” and “letters of intent” are compared and negotiated by the investment bankers, then the seller decides which buyer with which to move forward. This process puts all the negotiating power in your hands. The investment banker can help you select the other advisors on the team and will guide you throughout the sale process.
It’s exciting to receive an unsolicited offer to buy your company and to envision the next chapter in your life. But when you receive an unsolicited offer, you should pause and carefully consider your options. As the owner of the company, you can choose to proceed in any manner you wish. But just as you have done throughout all the years in which you ran your business, think carefully, do your research, and proceed with a well thought out plan. Study the table above to determine if your choice benefits you or the buyer, who you might look to for guidance, and when you should start working with them.
About Waypoint Private Capital
Waypoint Private Capital is an investment banking firm that educates and advises middle-market, privately held companies through critical stages of their business' life cycle. Waypoint helps business owners and entrepreneurs sell companies, buy companies, raise equity and debt capital for growth and recapitalization, and plan for a successful exit from their business.
To learn more visit waypointprivatecapital.com or call us at 608.515.3354 or 918.633.2647 and speak with a Waypoint Private Capital expert.
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