Dealing with an Unsolicited Offer
Any successful business owner who has been in business long enough has likely experienced the “unsolicited offer” for his/her business. Such an offer typically comes in one of several ways, from one of several types of groups. There are two types of unsolicited offers, typically originating from one of three types of buyer groups. First, we will take a look at the various types of unsolicited offers. Next, we will analyze the various groups from where such offers most typically derive. Finally, we will discuss key strategies in dealing with unsolicited offerings for the sale, merger or acquisition of a privately-held business.
Serious Offer vs. Clever Marketing
In many cases, a promise of an offer can come from one of several forms of marketing communication. It can come via phone (likely with some underling using a call script), email and even fax (yes, it still happens). The typical premise of such communication is this, “we have a buyer interested in your business. If you are interested in selling, please get in touch with ____________.” In some such cases, a real buyer may be present or behind the curtain of some engagement agreement. In fact, some may be paying a broker an outsourced buy-side M&A advisor, using the advisor as a third-party outsourced deal-sourcing agent. Both financial and strategic buyers often do this as a means of soliciting off-market deals and not-for-sale companies. We will discuss the importance and danger to a seller of such a strategy, but offers from unsolicited buyers are either direct-to-principal transactions or operating through a broker. In the cases where the broker is using the “we have a buyer in tow” as a front, the seller should be able to see through any clever Jedi mind tricks. Seller’s might ask:
- Who is your buyer?
- What is your buyer’s investment mandate?
- Why did you choose my company?
- What do you know about my industry? (if they have actually done their research, they should be able to tell you a thing or two about the company)
Such questions can help to filter the wheat from the chaff when it comes to real buyers. If, after an NDA and/or non-circumvent agreement, a broker makes an introduction to a real principal, institutional investor or strategic buyer, then such a buyer will likely wish to move down the path toward a more serious offer. In such cases, all unsolicited offerors will have a heavy incentive to keep the process private and untouched from other brokers and buyers. They will want to maximize their own value by cutting out potential demand on the deal. Economics 101: price is dictated by demand. Non-existent demand guarantees a lower price for a would-be buyer.
Broker, Financial and Strategic Buyers
Types of unsolicited solicitors can usually be placed into one of three buckets. The first and most likely perpetrator of at least the initial unsolicited offer is the investment banker or business broker. In many cases, this individual is likely on some type of fishing or hunting expedition, hoping to see what might stick. However, in some cases, the broker may be operating under a buy-side initiative from either a private equity group or strategic buyer. Strategic buyers can more notorious for hiring outside advisory assistance for acquisitions. Doing so keeps them one step removed from giving away their position to the would-be seller. Financial buyers often act the same way, but generalist firms typically have less of an confidentiality incentive for doing so.
Alternatively, a potential company seller may receive a direct M&A offer from a private equity group, family office or strategic buyer within the same or ancillary industry. When such an offer occurs, sellers should be flattered, but always aware that the first offer is almost never the best.
Red Flags from Unsolicited Offers
Receiving general information about or from an interested buyer is one thing, moving forward in discussions on a Letter of Intent or Stock Purchase Agreement is quite another. Sellers who settle for the unsolicited offer typically do not maximize the value of the business at the closing table. While it is true that such situations are often easier and less stressful (dealing with multiple buyers, less stringent due diligence, etc.) than a full-blown M&A auction, significant value is lost when a seller decides to go with the first or only offer. In some cases, a seller that engages directly with a principal buyer or the buyer’s representative without representation internally can result in more difficulty than the seller may anticipate.
Prepared sellers that may have already engaged with an investment banker or M&A advisor have likely undergone some preliminary due diligence in preparation for the Confidential Information Memorandum (CIM) or pitchbook. This disciplined process readily helps sellers prepare for the much more more stringent, full-blown due diligence exacted by buyers and their representatives. If a seller opts to go with the first offer from an unsolicited source and feels that due diligence is easy, there should be cause for concern: light due diligence could mean the buyer is comfortable with more skeletons in the closet because the value offered for the business is significantly below fair market. It is almost always true that the more a buyer is willing to offer for a business, the more critical the buyer will be on all items relating to due diligence.
Maximizing the value of your business in M&A requires a stringent focus on process and negotiations. Company owners who may receive that unsolicited offer may feel this is the one and only shot at exiting the business. With the amount of dry powder on private equity and strategic buyer balance sheets today, this is simply not true. There is almost always a potentially better offer in the sale of one’s business. Unsolicited offers are flattering. It is wise to take note from where the offer originates, including the contact information of the individual making the offer. A friendly response to such an offer can keep the door open to future opportunities perhaps when the timing is right for the business and its shareholders. In the case where the timing is right and more than one unsolicited offer has been recently or historically received, then is the time to fully engage an investment bank to run a process that will truly extract seller value.
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