If you are like most business owners, you are probably receiving a regular flow of emails and phone calls seemingly offering to buy your company. Private equity firms are sitting on piles of cash raised over the past five to seven years.
Publicly traded companies and other strategic buyers are struggling to create organic growth, and they have record levels of cash on their balance sheets. Everyone is poised for the flood of baby-boomer sellers that never seems to come. As a result, there is too much money chasing too few acquisition opportunities. While generally a good thing for business owners, a torrent of unsolicited offers can grow into an unwelcome time sink if not handled correctly.
So, what steps should you take when you receive an unsolicited offer, even though you have no interest in selling anytime soon?
Determine who the offer is really from. Careful analysis will usually reveal the sender’s role and thus indicate the proper response. Use the key below to match wording with the type of buyer.
- “I am working with several buyers…” This wording reveals that the sender works as a broker at an investment bank, boutique M&A firm, or business brokerage firm.
- “I represent a firm looking to make acquisitions in your industry…” This phrasing indicates that the sender is either a broker, as above, or an independent search agent for private equity firms.
- “We are a well-funded buyer with a history of interest (or past acquisitions) in your industry…” This language indicates that the inquiry is coming directly from an employee at a private equity firm.
- “My employer, Acme Corporation is ...” This is a strategic buyer, most likely in your industry.
File the offer, electronically or physically, according to the following system.
- Broker Inquiries—These inquiries should be filed in the electronic trash bin and/or physical garbage can. The veneer of working with buyers is meant to conceal the fact that the sender is simply fishing for clients. Brokers will not be hard to find when the time comes, so usually there is no need to hold onto these inquiries.
- Search Agent Inquiries—These inquiries can also be discarded. Search agents are most often employed by private equity firms. They are given broad search parameters and typically work for many different buyers. In the near term, these inquiries provide very little information about the level of interest, and the agent will resist telling you who the actual buyer is until after you’ve wasted a lot of time. There is little value in saving the inquiry because, by the time you are ready to sell, the agent will be on to other searches and industries.
- Private Equity Firm Inquiries—These inquiries indicate that the private equity firm has a genuine interest in your industry. Create a file and name it “Future Buyers List”. Store private equity firm inquiries there. If the firm is successful, it will still be in the market for acquisitions when you are truly ready to sell.
- Strategic Buyer Inquiries—Store these inquiries in your “Future Buyers List” file. You may already know about the buyer because you compete with them every day. Nevertheless, you should save the actual inquiry because it will have contact information for the person to reach out to when it does come time to sell your company.
Resist the urge to respond (with one possible exception).
As noted above, usually there is nothing to be gained by responding to inquiries from brokers or search agents, other than wasted time and increased distraction. Private equity firms can be genuine buyers, but we would not recommend responding to these inquiries either. These firms are notorious for chewing up business owners’ time with ever-expanding information requests. Today, they just want your financials. Next week, they’ll be asking for your customer lists and pricing model. Also, private equity firms look at roughly 100 companies for every one they buy. So, there is a very high probability that you would expend a huge amount of effort and achieve nothing, while losing focus on your business.
Strategic buyers present a slightly different situation because their inquiries typically signify genuine, informed interest. You may also be concerned that their interest may diminish in future years as the industry changes and/or they make other acquisitions. While these concerns are no reason to overreact, there is an argument for being opportunistic with respect to strategic buyers. However, you should ask yourself the following five questions before deciding to proceeded and respond to the inquiry.
Am I even ready to have a conversation?
There are several important steps to take to be ready to have this conversation, including:
- Do you know how to calculate your adjusted EBITDA? Do you know what it was for each of the last three years and year-to-date? Most transactions are valued at a multiple of adjusted EBITDA. You could be greatly understating the value of your company if you are talking to potential buyers but have gone through the process of adjusting (or “normalizing”) your EBITDA.
- Do you have a feel for multiples that companies in your industry have been selling for (beyond rumors and boastful country club talk)?
- Do you know your personal magic number – i.e. the post-tax amount you would need to achieve financial freedom? Bad guesstimates on that front can lead to passing on reasonable offers, or worse, needing to find post-exit employment.
Without these basic questions answered, you are not really in a position to even have a meaningful initial conversation with prospective buyers.
Am I positioned to maximize value?
Have you addressed the things that position some companies to trade at premium EBITDA multiples relative to their peers, while others sell at steep discounts? For example:
- Can the company run for several months without you? Have you extracted yourself from new business development and other key roles within the company?
- Are your financials bullet-proof? Are your projections optimized to maximize valuation, while still being readily achievable?
- Have you set your personal situation up such that you and your family can minimize taxes associated with the sale and any subsequent wealth transfer?
Am I likely to make it through to closing?
Approximately 50% of M&A deals fall apart between the initial offer (letter of intent) and closing, most often because the buyer discovers something unfavorable. Consider the following:
- Have you identified all the critical sales, operations and financial metrics that could potentially scare off a buyer, and are they all trending positively?
- Are your customer relationships and contracts where they need to be?
- Are all your legal documents current and aligned with a potential sale?
- Do you have access to all the information that a buyer will likely request, and does your team have the bandwidth to respond to these requests promptly?
Am I willing to tell them everything?
Given that roughly half of deals fall apart after the initial offer, and given that any negative answers to the readiness questions above will likely lower the odds of success, are you ready to tell your competitor everything about your company? Will a non-disclosure agreement provide sufficient protection after several layers of the buyer’s management team have analyzed your information?
Am I okay with flying blind?
Even if you are fully prepared to exit and can answer the first four questions affirmatively, the biggest question remains. Are you willing to give up the leverage and knowledge that is lost when you deal with a single buyer? Most business owners understand the loss of leverage, and you may decide that you retain the ultimate leverage by being able to walk away from a deal. It was ahead of your timetable to begin with. However, it is the loss of knowledge that can be more problematic.
Specifically, how will you know if you should walk away from a deal? If, after a few discussion, the buyer offers $25 million, how do you know if that’s the best you could do or if it is even a fair offer? Worse yet, what if the buyer offers you $25 million but then drops it to $21 million after due diligence? Naturally you will tell them to take a hike, right? Or, should you? By going down the path with a single buyer, you don’t know if the next highest bidder would have offered $24 million or $20 million. You might send the buyer away, and then find out when you run a sale process a couple years later that you should have taken that offer. And, it is not just about price. Maybe halfway through due-diligence you are not so excited about the buyer’s plans for your company or your people. You won’t have a second-best bidder standing by to call if you want to compare their plans for the company. Leverage is important, but knowledge is power. Business owners give up that power when they follow through on unsolicited offers.
Instead, we at NAVIX recommend that you discard the offers you receive from brokers and agents and save the ones you receive from strategic buyers and private equity firms. Identify an ideal date for you to exit your company, allowing enough time to fully prepare the company and your personal situation for exit. When you can answer the five questions above affirmatively, you can use the file of unsolicited offers to start your list of potential buyers. Then, enlist a broker to run a formal sale process with multiple buyers, so you can retain the leverage and knowledge necessary to achieve a successful exit.