Most Owners Make this Mistake When Approached by an Interested Buyer

What would you do if you got approached by an interested buyer?

One of the first things to figure out is whether they are a real buyer. Are they a competitor? Are they a financial buyer? (private equity firm, search fund, consolidator, etc.) Are they really serious or just tire kicking to see if they can get you at something less than market value?

In many cases, someone you compete against or do work with is aware of you and wonders if it makes sense to acquire you. Sometimes it does. But the process is fraught with challenges, can take months to pursue (often not closing), and carries a lot of potential risk (especially if they are a competitor).

If you get approached and aren’t working with an advisory firm, it makes sense to have a brief initial conversation to determine if it feels like it might be worth pursuing. If the answer is yes, this is the right point at which the shareholders should engage an experienced advisory firm and shift the burden of the process to them.

What most do is continue talking directly with the potential buyer thinking they will get to an offer and then decide what to do. But what they don’t think about:

  • Is the buyer legitimate? Or just fishing around to get information? (In our experience, most owners provide too much information too early – typically when a company gets approached,  the potential buyer is driving the process and making the demands while the shareholder(s) are simply reacting to their requests)
  • Are they prepared? Are all records up-to-date, is everything ready for close scrutiny? Or will the buyer start finding things that will give them a reason to claw back value?
  • How will they focus on growing their company while simultaneously trying to sell it? Transactions usually take months to work through and are very labour intensive
  • How will they know if any offer they receive is the best they could hope to get (either from any buyer or even from this buyer) without anything to compare it to?
  • How will they negotiate directly with the people they are going to have to work with for some period of time post-closing without putting the relationship in jeopardy?

Consider:

  • 85% of business owners don’t have, and have given little thought to, their formal exit strategy. Inadvertently they are counting on: “Someday, someone will come along and want to buy my company”,
  • 75% of their total net worth is the average that owners have tied up in their business,
  • 65% of business owners have little or no understanding of the financial or strategic values of their company,
  • 50% of shareholders sell their company without exploring their options so never know if they could have done better (better buyer, better offer, better valuation, better fit)

Waiting for a Buyer to Approach You is Not a Strategy

The odds that the best offer, with the best terms, and best cultural fit with your people coming from an unsolicited buyer are likely about the same as getting hit by lightning twice in one week.

We could write a small book about why owners and shareholders fall into this trap however it’s usually overconfidence in their own abilities and not understanding that they’re not prepared that causes them to go-it-alone.   Being the bravest, smartest, hardest working problem solver is what built their company, and at the critical time when they should get help, they decide they’ll go-it-alone again. BOOM.

Know that an Unsolicited Buyer:

  • Wants to save money by avoiding competition from others
  • Hopes you’re one of the 65% that don’t know their true value
  • Won’t offer to pay you for the synergies and strategic value you provide to them
  • Is hoping you aren’t prepared to sell, so they will find reasons to lower value
  • Wants to sell you on why “they know the market value”
  • Knows more than you about structuring a deal in their favour
  • Is banking on the fact that you’ll want to save money by not engaging an advisor (see the point in the next section below)
  • Wants to pressure you to move quickly (before you wise up and engage a firm to help you)
  • Often resells the business within a few years for substantially more than they paid you

M&A Advisors:

  • Minimize risk to your business by protecting your information and your relationship with the potential buyer
  • Take on the bulk of the work needed in a transaction (even with one buyer) so that you can continue to focus on growing and running your company
  • Often increase overall deal value by 20% to 100% (with average success fees of 5%, more than paying for themselves)
  • Can provide candid feedback on the quality of an offer and whether it would stand up to scrutiny against the market
  • Are able to invite additional interested buyers into what was a closed process to solicit competing offers and create the friction needed for leverage
  • Are able to create defensible valuations based on their direct knowledge of the market on previous transactions and public comps, combined with forecasts on post-transaction synergies
  • Bring you better buyers, resulting in greater post-transaction success and opportunities
  • Help you prepare, avoid costly mistakes, and minimize expensive buyer claw-backs
  • Maintain integrity of working capital adjustments
  • Help liaise with legal, financial, and other professionals to keep the process on track and efficient for all
  • Actually get the deal done! Many deals fall apart pre- and post-LOI or in Due Diligence. Experienced advisors can address challenges and keep things from falling apart

Plan, Don’t React

  • Develop a relationship with an advisor before you need them – get to know them and help them get to know you and your company
  • Get your company in order, always be ready and prepared to act
  • Be aware of your value to various types of buyers every year
  • Understand what the market conditions are and whether the timing is favourable to explore your strategic options
  • Be prepared to say no, and to seek alternative purchasers
  • Understand that an unsolicited offer is highly unlikely to be the best offer or the best buyer

If you’ve been approached and would like to talk about next steps, or would simply like to discuss what we’re seeing in today’s market, let’s connect for a brief confidential call here.

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