By: Patrick Ungashick
If you are like most business owners, you probably receive a regular flow of emails and phone calls seemingly offering to buy your company. Private equity (PE) firms and strategic buyers are sitting on record amounts of cash and must make acquisitions to hit their business objectives. Everyone is waiting for the flood of baby-boomer business owners selling their companies, but it never seems to come. As a result, there is too much money chasing too few acquisition opportunities. While this is generally a good thing for business owners, a stream of unsolicited offers or inquiries can grow into an unwelcome time sink if not handled correctly. Also, if you are not careful in how you respond to these offers, you can harm your company by potentially sharing sensitive information with a competitor or sparking rumors that your company is on the market. So, what steps should you take when you receive an unsolicited offer?
Part 1 of this series covers your first steps upon receiving an unsolicited inquiry. Part 2 will explore how to proceed if you have had an initial conversation and wish to continue. Part 3 addresses what advisors you need if you decide to potentially pursue a sale in the near term.
Step 1: Determine who the inquiry really is from. To evaluate if an inquiry is legitimate, you must know who sent it to you. Sometimes, the sender will fully disclose their identity, but in other situations the sender may be intentionally vague. If it’s not immediately clear who the sender is, look for the key phrases 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 a PE firm.
- “My employer, Acme Corporation is ...” This is a strategic buyer, most likely in your industry.
Step 2: If you are 100% sure that you are not interested in selling your company now or for at least several years, then file or trash the inquiry according to the following guidelines:
- Investment Bank or Broker Inquiries: These inquiries can be trashed. The veneer of working with buyers is meant to conceal the fact that the sender is simply fishing for clients. Bankers or 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 typically employed by PE 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.
- PE Inquiries: These inquiries indicate that the PE 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 likely will still be in the market for acquisitions when you are ready to sell.
- Strategic Buyer Inquiries: Store these inquiries as well in your “Future Buyers List” file. You may already know about the buyer if you compete with them. Nevertheless, save the actual inquiry because it will have contact information for the person to reach out to when it comes time to sell your company.
Step 3: If you might be interested in exploring the sale of your company in the near term, take the following actions:
- Look up the inquirer online at their website or at LinkedIn to gain more information. Search if their company has made other acquisitions and announced those purchases in the media.
- Reply to the inquiry to gain more information. The inquirer will want to set up a call or meeting—try to limit this to a call because that takes less time and in turn reduces the risk you will say too much. Experienced buyers know that many sellers usually say too much too soon and take advantage of this.
- During the call, stick to these points:
- Ask or verify who the sender is if you don’t know already.
- At some point they will ask why you agreed to take the call. State that your company is not for sale (which is true—they contacted you) but as a prudent owner you keep an eye on the market.
- As early as possible into the call, ask what is their search profile? This potential buyer will have a list of characteristics that they are looking for in an acquisition, such as company size, location, growth rate, operating method, team credentials, proprietary technology, market share, etc. They should readily share their search profile with you.
- Introduce yourself and your company in the same way you as would introduce yourself to a potential new customer or new hire.
- The sender will ask questions about you and your company. Follow the “New Customer or Hire Rule” when answering any questions. If the question asks for information that you would comfortably share with a potential customer or new hire candidate, then answer that question. If the question asks for information that you would not typically provide a potential customer or hire, then politely decline to answer at this time. (Common examples of information that you do not share includes your company revenue, profits, customer names, key employee names, ownership structure, growth strategy, etc.) Always keep in mind that this other party is either a competitor or may be one in the future.
- You do NOT state what price you would take to sell the company—some aggressive inquirers will ask, and you cannot fall into this trap. Any number you give reveals too much and sets the ceiling for the maximum price this party will ever pay for your business if the conversation ever gets that far. Some people believe it’s good to name your price up front, because you save a lot of time if the buyer is unwilling to pay your amount. Wrong. Buyers ask because they know the negotiating rule that “Whoever speakers first loses.” You need to remember too.
- At the end of the call, if your company is incompatible with their search profile, simply state this and thank them for their time. Do NOT explain why your company does not fit their profile, such as if your company is too small. Again, you are talking to a competitor or possible future competitor. Do not give sensitive information.
- If your company seems to fit their search profile, and if you wish to continue the discussion, ask them to send you an NDA (non-disclosure agreement) as the next step. Let them know you will get back to them after you and your attorney have reviewed the NDA.
Once you say that you wish to continue the conversation, the potential buyer will be eager to get more information from you and/or set up a follow up call or meeting. After all, you are a fish nibbling on their hook. You must politely resist until you are ready to proceed. And it is important to understand that most owners are not ready to proceed. Your company was not for sale (at least not yet) and therefore you likely have to take a few steps to make sure you are ready before proceeding.
Part 2 will explore how to proceed if you have had an initial conversation and wish to continue. Part 3 addresses what advisors you need if you decide to potentially pursue a sale in the near term.
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If you have unsolicited offer that you are dealing with right now and wish to discuss the situation with our team, contact us to set up a confidential and complimentary call.