So you received an unsolicited offer on your business?
Someone approaches you out of the blue—a multinational, a competitor, a financial investor, and wants to buy your business. They invite you to dinner, the chemistry is good, they talk about a valuation that seems more than fair. What should you do?
To start with, be realistic. It normally takes a company three to six months of preparation to have the information necessary to satisfy the information demands of an investor and, if possible, to find and fix those problems in the business that might lead to a diminished valuation. By entering into a negotiation on the basis of an unsolicited offer, you are attempting to short-circuit this preparation process. The potential for failure is enormous, particularly if the seller has never before engaged in a transaction. Whatever you do, you must not underestimate the amount of preparatory work required to carry out a transaction.
The following scenario has happened no doubt thousands of times: an unsolicited offer is made and the parties agree to a “back of the envelope” deal, subject to information to be provided by the seller, and a purchase and sale agreement. They shake hands and part company, confident that a deal will occur.
Then problems begin: the investor sends the seller a list of questions which is much longer and more detailed than the seller expected. The seller spends a great deal of time on the questions, tying down management resources, whilst the investor expresses dissatisfaction at the delays. Eventually, the seller provides answers which the investor considers to be at best partial. This leads to a supplementary list of questions being submitted, and so it goes on, taking time that should be spent by the seller and management running their business. The investor eventually brings in lawyers, auditors, tax advisors, who have even more questions. The seller keeps providing information, increasingly frustrated by the depth and breadth of the inquiries and the huge amount of time involved. The investor often discovers inconsistencies in the information. It is quite likely that a number of surprises will be found, depressing value—perhaps a tax liability, negative market trend, lawsuit, or other factor that brings down price. The seller is then in the unenviable situation of having consumed considerable time providing a huge amount of confidential information, only to find that the valuation is much lower than anticipated.
So what should you do to avoid this kind of situation when you receive an unsolicited offer? Assuming you really do want to sell your business, if you are not fully prepared, ask for a few months of preparation time. Have your advisors assist you in preparing all of the necessary information. It helps to have an outsider, who knows the information demands of investors, to ask the hard questions and play the devil’s advocate. Every attempt should be made to identify the weaknesses of the business before an investor spots them—whether it’s slow inventory turns, aged receivables, or anything else—and, if possible, remedy those problems prior to taking the company to market.
Once you have the information fully prepared, you might consider whether to talk only to the one investor who approached you, or to open negotiations with multiple investors in a competitive process. Unless you open the process to competition, how will you know whether you have got the best deal possible on selling your business? Once you have properly prepared your information, running a competitive process is not that difficult. Negotiating with a single investor should really only be considered when the investor is offering an extremely attractive price, or you are reluctant to share information with too many potential rivals.
Owners of companies typically vastly underestimate the amount of preparation required to sell a business—particularly in satisfying the information requirements of investors. Being able to provide quality information at short notice is a sign of good management, vital for a good valuation. Investors will deduce the contrary if information provided is of poor quality, or takes too long to receive. The seller will not get a second chance to make a first impression.
Bottom line: be prepared!