What should you do if you receive an unsolicited offer for your business? Most business owners do not prepare themselves to have a conversation surrounding the sale of their business. Prospective buyers are constantly searching for investable businesses, strong-cash flow generating companies, and opportunities where they may already have industry experience. With some premeditated thought, business owners can ensure they are prepared for an unsolicited offer from a competitor, employee, or financial buyer, and know how to properly respond. The first response from a business owner is very important to set the groundwork moving forward and to protect confidentiality.
Unsolicited Offers – What to do?
It’s important to establish ground rules when approached by an unsolicited potential buyer. While honesty is always important, it’s key to hear out the offer before disclosing any information. Even if the business is not for sale, it’s in an owner’s best interest to understand what a potential buyer is proposing. Be sure to thoroughly understand the offer and be cautious of sharing information before a non-disclosure agreement is in place.
If the offer merits further conversation, get a signed non-disclosure agreement in place to protect confidentiality. Nothing good usually results from customers, competitors, and employees knowing that the business may be for sale. Be careful with the NDA and ensure that the term is a minimum of 2 years to keep the information confidential. It’s also important to set expectations. We encourage business owners to clearly communicate to the buyers they will be represented by a team of advisors throughout the sale process, even if you don’t currently have an advisor. Tire kickers will fade away if they know a buyer will be represented by a knowledgeable advisor. Experienced buyers will respect and acknowledge that a seller is not going to be taken advantage of. Once a non-disclosure agreement is in place, it’s generally ok to talk about confidential information, although we advise sellers to begin only by revealing high-level information. Try to understand the objective of the buyer. Do your research to make sure you feel comfortable talking with the buyers and ensure they have the capability to pull off a transaction. Initial discussions are as much about learning about the buyers as it is having the buyers learn more about the business. Questions surrounding a buyer’s existing business, financial capability, and their vision for the business are all fair game.
If the conversation continues to progress and the buyer wants to see all detailed and confidential information from the business (for example, tax returns and customer lists), we strongly recommend a seller engage with an advisor if they have not already. A trusted advisor will be able to guide you through the scrutiny and due diligence of a buyer. Keep in mind, that as a seller you have the right to disclose the information you are comfortable sharing. Until there is a signed letter of intent in place, it’s still important to be wary of sharing critical business information. Sometimes it’s best to share redacted information, such as customer concentration without specific customer names, employee rosters without last names, or detailed financial information. Again, this information is not always necessary for a buyer to put together an offer but can be shared upon the signing of a letter of intent and entering the due diligence phase.
When to get an attorney involved?
As discussions progress and a letter of intent (LOI) appears imminent, it’s best to begin conversations with an M&A attorney. Interview several attorneys and decide on one to utilize so that by the time you receive the LOI, you can proceed seamlessly. An attorney is very important in drafting and reviewing the LOI prior to signing, as they can help protect the seller and ensure that all terms that have been discussed are included. Bringing an attorney into a situation where the LOI has already been signed may limit their ability to craft a purchase agreement in the seller’s best interest. Getting a proper LOI in place with the assistance of an attorney is crucial, as it is the last time the seller will be in a position of relative power throughout the close of the transaction. After a signed LOI, the purchase price and terms rarely improve for the seller and buyers will scrutinize through the due diligence process. Oftentimes, buyers will use the due diligence period to try to justify lowering the price or altering the terms. The LOI represents commitments from the buyer that should be included in the LOI in order to draft purchase price agreements reflective of conditions that both parties have previously agreed to.
What not to do when you receive an unsolicited offer.
Confidentiality throughout a sale process is crucial. When you first receive an unsolicited offer, your natural instinct may be to tell your friends and family or even someone that has inquired about the business in the past. Don’t tell anyone besides a trusted advisor about the offer as people talk and rumors spread quickly. Word getting out that a business is for sale is the quickest way to lose trust between potential buyers, customers, and employees, and can potentially kill a deal.
Second, be careful disclosing to the buyer how much you want for the business. It’s better to have this conversation later in the process after the credibility and fit of the buyer is established and next steps have been taken. If you’re not sure what the business is worth, guessing or giving out unrealistic price expectations will likely either undervalue the business or scare potential buyers away. Having an advisor perform a valuation, which all good advisors should do prior to initiating the sale process, should give you a pretty good idea of what to expect for the business. Also, be careful what you disclose to a buyer upfront. There is plenty of time for due diligence and discussion of confidential information post-LOI, do not give prospective buyers anything they ask for.
Finally, take great care to not become distracted when approached by an offer. Running day-to-day operations should continue to be your main focus as a business owner. Consulting with an advisor or setting aside time to contemplate an offer is the most efficient way to ensure you have properly thought through an offer and are still able to maintain and grow the business. Once business owners see an offer come through and even proceed under a signed LOI, they may tend to shift their thinking towards having already sold the business. Again, this is a mistake as there is no certainty until a purchase agreement is in place and funds have been transferred. From start to close, a sale process can take many months and if a seller diverts their focus from the business, profits can suffer which can ultimately lead to lower business value and subsequent price reductions from the buyer. Continue running the business as if there was no offer and a seller will be in the best position regardless of the outcome.
Getting a deal to close.
Buyers will make unsolicited offers because they are seeking business opportunities where there is no competition. Beware the single buyer dilemma, as that puts the seller in a disadvantaged negotiation position. If a buyer knows there is an intermediary involved, then it’s likely they’ll put a better foot forward when submitting an offer. When a buyer knows the seller is attempting to sell without an intermediary in place, they’re more likely to try and manipulate and submit an offer undervaluing the business.
Through the diligence process, buyers will uncover any skeletons in the closet. It’s best practice to honestly discuss any hurdles the buyer may face upfront as this prepares the buyer. If an issue is discovered post-LOI the buyer may not only wonder what else wasn’t disclosed but will likely try and get a price reduction. In the long run, complete honesty and transparency will help the transaction close and ensure the due diligence, closing process, and even post-close transition is smooth.
Be realistic. Some owners have a number in mind that they “need” in order to sell the business. Sometimes, this can cause a seller to reject otherwise quality offers. It’s incredibly important to have a realistic expectation of what the business is worth and also to consider creative deal structures that may help bridge a gap between perceived buyer and seller value. Avoid setting unreasonable expectations and realize through a well-run process the market will speak to the value of the business. Win-win deals are the deals that close and an advisor can help structure appealing terms and compromises that work for both parties. There are lots of tools, including tax elections, deal structure, as well as other agreements that can be used in negotiation to structure a win-win deal.
Deal fatigue is real, and we’ve seen it occur in potential transactions where an owner is not prepared for the rigorous negotiations, diligence, and deadline-driven process. Keeping momentum is crucial to meeting deadlines and getting an unsolicited offer to close. Consult a trusted advisor and follow the guidelines laid out in this article to protect your business. Proactively plan for the sale of your business so you are prepared when unsolicited offers arise.
The team at Small Business Advisors has guided many business owners through the sale process. If you have been approached by an unsolicited offer, are looking to be proactive in your planning or just have general questions, please contact us and we’d be happy to help.