Channel, Security Strategy, Plan, Budget, Channel, Channel

How to Manage an Unsolicited Offer For Your Business

According to a Deloitte report, “Corporations and private equity firms foresee an acceleration of M&A in 2018 – both in the number of deals and the size of those transactions."

(Editor's note: ChannelE2E certainly agrees.)

For business owners, this is good news. However, this flurry of deal activity results in unsolicited offers for many small business owners. That is what happened to Joe, the owner of a small manufacturing firm.

Joe called me wondering what to do since he had received an unsolicited offer to buy his business. The buyer was willing to pay him three times annual revenues, plus his net assets on an earn-out basis over the next three years. In addition, there were no non-compete clauses in the offer. However, the purchase price had to be supported by an independent, certified valuation.

On its surface, this deal seems workable. However, Joe was caught off guard since he had not seriously considered selling his business. He didn’t know what to do. Here's the advice I gave him.

Unsolicited Offers: What Business Owners Need to Consider

First, be careful about how much information you divulge to the person representing the buyer. Request a signed confidentiality agreement from the potential buyer. A genuine buyer will not balk at this request. Consider if the offer is coming from a legitimate potential buyer or from a buyer with ulterior motives, such as acquiring intelligence about your business and its customers. It is critical to conduct proper due diligence up front to understand the suitor’s motivations and whether to engage.

Second, take time to consider whether or not you want to sell your business now. Many owners wait to begin thinking about selling their businesses until their businesses are declining or they have been hit with unexpected major events, such as divorces, severe illnesses or deaths in the family, or losses of key employees, large customers or key suppliers. As a result, owners react, by making emotional decisions rather than strategic ones. Owners, who plan ahead, are more likely to extract higher values for their businesses when they are highly profitable and positioned for strong growth.

Third, if you are interested in selling your business, seek help immediately from professional M&A advisors. They bring professional experience and expertise and provide significant value by helping you understand all of your options and help you avoid making emotional or irrational decisions. Know that you are at a disadvantage, to begin with, since most buyers, who tender unsolicited offers, have made other acquisitions. They are sophisticated and come with M&A advisors who are strong negotiators. Generally, most business owners who receive unsolicited offers haven’t taken the time to prepare their companies for sale. As a result, they often leave money on the table which is just what potential buyers are counting on.

Fourth, consider whether you have enough capital to continue to grow your business and stay competitive. Seeking external capital or recapitalizing by selling a minority or majority interest in your business could be a better option than an outright sale of all of your business.

Fifth, look at the market you serve. Consider both the short-term and the long-term prospects for a promising future. You may find, while business is good now, the long-term prospects are going to be challenging due to emerging trends or new displacement technologies that could threaten your current business model.

Sixth, look at your concentration of customers and suppliers. Are you too heavily dependent on a few customers or suppliers? Generally, if over half of your business revenues come from 10 to 15 percent of your customer base, you have a concentration of risk. Buyers will not pay top dollar for businesses if they feel threatened by this concentration of risk.

Consider the Suitors' Background

Seventh, consider the buyer's background. Many times unsolicited offers come from so-called “private investment search firms.” These are firms, formed by a group of investors, who promise to fund a potential acquisition if the right deal comes across their platform. The investors hire a fund manager to seek out potentially good deals. Once the fund manager has found a potential target and gone through the transaction process with the seller except for drafting the definitive purchase agreement, he goes back to the investors and tries to “sell” the deal.

All too often, one or more of the so-called investors balk at the deal and the potential transaction falls apart. In the meantime, weeks or even months have passed leaving the owner empty-handed after spending countless hours, energy and money trying to get the deal closed. The message is obvious –owners should vet the potential suitor to ensure the search fund has been fully funded and has the financial capacity to acquire your business.

Finally, identify what methodologies the potential buyers are relying upon to value your business. This is critical for business owners looking to maximize value. Price is generally based on a multiple of some form of normalized earnings/revenues.

Therefore, higher adjusted earnings equate to higher purchases prices.

Most business owners need help to sort through the intricacies of selling their businesses. It is wise to consult qualified advisors such as M&A consultants, transaction attorneys, accountants, and wealth managers.

Joe followed those steps and wound up closing the deal of a lifetime.

Gary Miller ([email protected]) is the CEO of GEM Strategy Management Inc., an M&A consulting firm advising middle-market private business owners. Read more of Miller’s blogs here.