Unsolicited Offers to Buy Your Business: Evaluating Your Options
Picture it. You’re putting out fires, rushing to meet due dates, and juggling a dozen interruptions when the phone rings. The caller tells you they’re interested in buying your company.
You’re flattered and tempted, especially considering the day you’re having. But when not handled properly, an unsolicited offer to buy your business can be a risky proposition.
Before You Do Anything, Hit Pause
As a business owner, you don’t make decisions in the heat of the moment, and an unsolicited offer, no matter how exciting it sounds, is no time to start.
You’ll need time to consider whether you even want to sell your business, whether the timing to sell is right, and whether the offer is legitimate.
Conduct Due Diligence on the Suitor
When you jump on an unsolicited offer to buy your business prematurely, you expose yourself and your business to unnecessary risk.
An unsolicited offer might be genuine, or it might be a fishing expedition, an effort to gather intel on the competition or the market. Even if the call is legit, you don’t know how many calls the interested party has made to potential sellers and how serious they are about buying your business.
When performing due diligence on the prospective buyer, you’ll want to confirm that they are qualified buyers and that their offer is serious enough to consider. Verify all information presented and be prepared to request additional information, if necessary.
Assess the Market
It’s always preferable to sell a business when the business and the market are trending upward. Remember that valuations are based on future earnings potential as well as historical financial performance, and acquirers are willing to offer higher prices when market conditions are robust.
If market conditions aren’t favorable, or if your business has hit a rough patch, and you don’t have to sell, you might be better served by waiting for the tide to turn.
Consider, too, that buyers canvassing businesses for acquisitions and mergers are typically sophisticated. They are often private equity firms, strategic buyers, or financial buyers with a firm grasp of the market and their own investment criteria. Just because they use a phrase like “top dollar,” it doesn’t mean they’ll meet your price once they’ve fully evaluated your company.
Respond Cautiously
Respond to the suitor with a polite thank you. Tell them your business isn’t currently for sale, but you would be open to an exploratory discussion to find out more about the type of business they’re seeking. Let them know you’d like to bring your business broker (whether or not you actually have one) into the loop and ask for their contact information so that you can call back with some potential meeting times.
Don’t offer information on your business or the conditions under which you might consider a sale. And definitely don’t throw out a number. At this point, there are too many unknowns, and anything you say can shake the stability of your business and the confidence of employees and customers.
Even an innocent response like, “I might be interested in selling for the right price,” can become industry scuttlebutt, fuel rumors that your business is on the market, and affect your bargaining power and your business if the news travels.
Unsolicited Offers Are Usually Proprietary Deals–And That’s a Big Deal
Unsolicited offers are usually proprietary deals, which means you’re required to give the potential buyer the exclusive right to negotiate with you for a period of time. In many cases, you’ll be prohibited from negotiating with any other prospective buyer or from listing your business for sale while the negotiation period is in effect.
By giving a prospective buyer exclusivity, you’re eliminating the competition that can drive up your purchase price. You’ll want to be certain that you’re negotiating with the right buyer before you sign away all that bargaining power.
How to Keep the Ball in Your Court
The phone call probably caught you off guard, so it’s important to get back on solid footing quickly. You’ll first need to decide if you are willing to sell your business. If the answer to that question is yes, you’ll want to enlist some professional help to evaluate the offer, establish a fair market value for your business, research other possible buyers for your business, and negotiate the terms of the sale.
Your team should include:
- business broker
- an attorney, and
- a CPA
An experienced M&A attorney will ensure that the letter of intent is non-binding, so you aren’t locked into the terms it sets forth. Besides drafting purchase agreements and other contracts required, these professionals can walk you through the many details included in the LOI, make sure all key areas are covered, and negotiate changes.
A CPA or tax accountant can set up the purchase price allocation and the deal structure to ensure that the conditions of the sale and the tax treatment you’ll receive are favorable to you.
You might also benefit from a wealth advisor for estate planning and assistance in deploying the proceeds of your sale.
Review the Letter of Intent
Buyers and sellers use a letter of intent (LOI) to lay out the general terms of a proposed sale and serve as a starting point for negotiations. A careful review of the LOI will reveal terms you find unacceptable and the areas where you’ll want to focus your negotiations. Make sure your LOI is non-binding and bring in your deal team before signing it.
Keep in mind that even a non-binding LOI will set the tone for the negotiations that follow. It’s important to look beyond the purchase price and determine whether the terms outlined in the LOI will meet your objectives and needs.
Some of the terms to consider include:
The type of sale. Asset sales and stock sales differ based upon the elements included, such as whether the buyer is acquiring your business debt. If you plan to start a new venture and you want to retain some of your business assets, an asset sale might be preferable to a stock sale.
The purchase price. The sale price offered in a LOI is subject to many conditions. One common tactic used by buyers is to offer an inflated purchase price and then negotiate it downward based on an unexpected problem uncovered during the due diligence process.
The purchase price allocation. The method used for allocating the price of different components of the sale can have significant implications for the taxes you’ll pay. In general, a purchase price allocation that’s favorable to a buyer has adverse tax implications for the seller. You’ll want a seasoned tax professional on your team for that reason.
The training period provided. Most buyers ask sellers to make themselves available for a period of time after the deal closes to familiarize the new owner with systems, customers, vendors, and other aspects of the business. Depending on your plans following the sale, you might not want to commit to a long training period.
The financial structure of the sale. Sales can be structured in many ways, including financing all or part of the deal with a seller’s note or using an earn-out that provides additional money to the seller if certain performance metrics are met after the deal has closed. Decide whether you want to receive all the sale proceeds upfront or whether you’d like an ongoing income stream to fund other ventures or retirement.
Targets for working capital. Working capital, the value of current assets less current liabilities, can fluctuate between the start of negotiations and the close of the sale. Deal terms typically set a target for the amount of working capital that will transfer to the buyer at closing. When the seller delivers less working capital than the targeted amount, buyers can ask for an adjustment to the sale price. Here, too, an accounting professional experienced with mergers and acquisitions can be invaluable.
Non-compete provisions. Buyers might want to restrict you from starting a new, competitive company or working for a competitive company once the deal closes so it’s important to have a clear idea of what you plan to do after you sell your business.
Get a Valuation
Getting a business valuation is essential if you want to know what your company is really worth. A business broker can provide an objective valuation based on your business’s past and current financial performance and future prospects.
These professionals can tell you how the offer you’ve received stacks up against recent sales of comparable companies. They can also dig up information on the type of buyer making the offer, whether they are financially qualified to acquire your business, and if they’re a good fit for your business.
Advisors can also research other potential buyers and create competition for selling your business.
Obtain a Non-Disclosure Agreement
As the sale process proceeds, you’ll need to share a lot of sensitive information with the prospective buyer. It’s essential to keep the information you share from being used in a way other than intended and to keep your discussions as close to the vest as possible. It’s important that employees, customers, vendors, and competitors don’t learn of your plans prematurely or gain access to the information you’re sharing.
An attorney can prepare a non-disclosure agreement that protects against information falling into the wrong hands and keeps your most sensitive information from becoming public if the sale falls through.
How Not to Squander an Unsolicited Offer
An unsolicited offer can be a great opportunity, or it can be a minefield of problems. You won’t know until you explore it further. By proceeding cautiously, you can eliminate at least some of the risk that an unsolicited offer presents and clear a path to take advantage of the unexpected opportunity.
No matter how enticing the offer sounds, it’s important to retain control over the sale process. Remember that a deal isn’t over until it’s closed, and a lot can change between the time you first receive an unsolicited offer and both parties sign a purchase agreement.
Don’t allow the would-be acquirer to dictate the timeframe for the process. Take the time you need to conduct a thorough evaluation of the offer and research other opportunities. Creating a competitive bidding environment is key to achieving the highest possible sale price.
Take all the precautions you can to ensure that your negotiations remain private. When word that you are selling your business gets out to the market, competitors, employees, and customers, it can not only hurt your business, it can also derail the transaction.
If you receive an unsolicited offer to buy your business, consult the BizBuySell Broker Directory to find a business broker to help you navigate the opportunity. If you choose to follow-up on the offer, having a team in place to help you prepare your exit strategy, and get the business ready for an acquisition will be invaluable.