You received an inquiry or offer to buy your company - now what?
An unsolicited acquisition offer for your business can come as a surprise. If you haven’t considered selling your company or you are 3-5 years out from your planned exit, you may be caught off guard. This can lead to stress and worry about making the right decision in order maximize the sales price.
No matter what your industry of focus is, there are some key strategies you should employ when faced with an inquiry or offer to acquire your company. The decision you make must be an informed decision in alignment with your objectives.
Avoid Knee-jerk Reactions - Risks of Responding
Responding to an unsolicited offer can present significant risks to your business. Professional acquirers routinely reach out to businesses to gauge current or future interest in selling your company. These solicitation calls or in-person approaches are not confidential. Anything you say can be shared with other parties of interest, so a casual response can have significant consequences. If you respond to an unsolicited offer with any information about your readiness or willingness to consider selling given the right price or conditions, that information can be passed on to a strategic market of buyers and investors. Should this information go public, it could disrupt stability and confidence in your company. As a result, your company is placed in a defensible position with competitors, employees, lender or investors.
So what is a smart initial response when you’re caught off guard by an unsolicited inquiry to sell your business? First of all, politely thank your suitor for their interest. Let them know the business is not currently for sale, however, let them know you are open to a strategic discussion. Ask them to email you their contact information and tell them you will respond with some dates/times you are available for a conversation. By fielding the inquiry in this way you are giving yourself an opportunity to assess the opportunity without coming off as over-eager. Additionally, allow yourself sufficient time to think through what information to share with this interested acquirer and how to best position your company. This is a good time to contact an investment banking advisor. They will help you qualify the potential buyer to ensure it is a legitimate opportunity and they will work with you to develop an initial engagement plan. This approach will help to avoid the many pitfalls which can arise if you provide too much information or present your company in a way that you will soon come to regret. Is very common issue and, in some situations, information shared by business owners has come back to bite them.
Getting A Team In Place - The Benefits of Enlisting the Help of Specialists
Don’t go it alone. Assemble a team to help you navigate the decision-making process. This should include an accountant and a mergers and acquisitions (M&A) attorney if you decide you want to explore selling. Obtaining professional advice from a M&A financial advisor is also strongly recommended at the very beginning of the evaluation phase. An advisor can show you multiple exit and growth options, assess readiness, uncover clear objectives to achieve through a sale, and provide a detailed valuation analysis. Gaining a professional, clear picture of any risks and legal implications relating to the proposed acquisition is essential before you proceed further in the sales process.
Acting alone places greater risk on the business hitting its operating goals and financial metrics. The management team will be asked to effectively perform two jobs: operations and running an effective M&A process, and dealing with the multiple, in-depth due diligence requests of buyers. In most cases, taking your eye off the ball impacts resulting financial metrics and, ultimately, the sales price for the business. Keep in mind, the final sales price is based on the company financials as of the executed purchase agreement, not at a time prior to closing.
Moreover, acting alone can also weaken your negotiating power. If you have received an offer from a strategic acquirer or a private equity company, these companies are professional acquirers, with significant experience in negotiating sale terms. This places you at an immediate disadvantage and your potential acquirer may take advantage of you during the negotiation process.
Responding without a well planned strategy can put you at risk of appearing too eager, giving the impression that you need to sell. As a result, you will reduce your competitive advantage. Inadvertently providing a figure you’d be happy with is also a negotiation mistake. As a business owner, you need to be in control of the process and the flow of information, and surrounding yourself with an expert team of M&A advisors can make sure this happens.
Taxation of profits must also be considered in advance. Naturally, you want to achieve the best possible price for your company. But did you know that the structure of a transaction when selling your business can have an impact on your tax liability? For example, with a $30 million acquisition, you could reduce your tax liability by more than $5 million with the right structure. By partnering with a team of professionals around you, you will get the best possible price for your company as well as the best fit. Alignment to your current and future objectives is key when working through the sales process.
Gauging Real Interest - Letter of Intent or Purchase Offer
It’s normal practice as part of the acquisition process, for the interested party to provide you with a letter of intent (LOI) or purchase offer. If you have received an unsolicited offer via some other method – for example, a phone call – you or your advisor would ask the acquirer to submit a letter of intent or purchase offer if you’re interested in finding out more.
This LOI or purchase offer document is an outline of the proposed acquisition terms and is not a legally binding agreement. Typically, it will include information about the proposed sale price, conditions of the sale (which may include transfer of IP, licenses, transfer of contracts and conditions relating to employees), principles and terms of a possible agreement. It is essentially a precursor negotiation starting point to a formal acquisition agreement. The LOI or purchase offers a good basis for you to conduct due diligence before you commit to the next phase of the sales process.
Evaluating The Opportunity & Moving Forward
As a business owner, you have invested significant energy, time and financial resources into your business and you want to be confident that you’re getting the best possible price and opportunity for your company. If you have not previously put strategic thought into what your personal and business exit objectives are, you’ll be at a regrettable disadvantage when evaluating an opportunity to transition.
An M&A advisor will assist you in determining if an acquisition makes strategic sense for your company - and whether the presented offer is a good fit. They will measure the potential opportunities against a comprehensive assessment of how the acquisition aligns with your own personal and company objectives. This will include examining the current market dynamics of your specific industry of focus and considering other potential active buyers. An M&A advisor will research what other opportunities are out there for you, so you can understand and evaluate all options available and achieve the optimum outcome.
Human capital is also an important consideration in the sale of the business. What will the impact of the acquisition process be on your employees? And, how will these impacts be managed? An advisor can ensure the critical factors of confidentiality and timing of the release of information are managed in a way that brings the greatest benefit and reduces risk. Notifying employees too early can increase uncertainty and lead to key position resignations. Negotiating key employee transitions as part of the acquisition and delivering this information with the announcement to employees can support a smooth transition and continuity of business.
The sale of a business is a specialized activity that involves detailed due diligence, evaluation, and negotiation to minimize tax ramifications and business risk while maximizing value and fit to your objectives. Enlisting a team of advisors including an M&A advisor, means you’ll be able to make a well-informed decision about the future of one of your greatest assets - your business.
Whether you are a few years out or considering an offer now, every business owner should have a clear understanding of the current value of their business. Objective Capital’s Business Valuations combine investment banking and extensive industry specific experience to provide strong strategic guidance for our clients. Contact us to arrange a confidential discussion about your business’ value and options.
Additional information on Objective Capital Partners is available at www.objectivecp.com. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. The Principals of Objective Capital are Registered Representatives for BA Securities. Objective Capital Partners and BA Securities are separate and unaffiliated entities.
This article is provided for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. While the information provided herein is believed to be accurate and reliable, Objective Capital Partners and BA Securities, LLC makes no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person.