There has been plenty written about what to do when you plan to sell your business in an auction process on the open market. What is less explored is what you should do when you are contacted by someone seeking to buy your business when you didn’t have plans to sell.
While it is exciting and flattering to get the call, how you handle the process can make a big difference in the outcome.
If you decide to seriously engage with an unsolicited offer, our core advice is to find a way to assert control over the process by creating a structure. This will give you the best chance to get a fair price and good deal terms.
While every situation is unique, there are certain things that you should be aware of when it comes to dealing with unsolicited offers to buy your business:
Who is the purchaser?
You might be contacted directly by an interested party or by an outside consultant hired to represent them in a buy-side search. Conversely, a consultant may approach you, looking to represent you in a sale. Sometimes who the purchaser is might be obvious, other times it can be hard to tell who the contact is representing.
Purchasers can include private equity platforms and financial or strategic investors. Regardless of who they are, they are likely already familiar with the M&A process, which gives them an advantage in negotiations and outcomes. To level the playing field, it is important to prepare both yourself and your organization to maximize your value on the best terms.
Know your value
Knowing the value of your business will help you gauge whether the price you are offered is fair or whether you need to negotiate a higher price. Chartered Business Valuators (CBVs) are well positioned to advise on this and to produce a formal business valuation or pricing analysis.
Control the process
When you are the party being approached, versus when you take the initiative, it is important for you to exert control over the deal. If you do not yourself have experience in selling a business, it is a smart idea to engage financial and legal advisors with demonstrated experience in M&As.
Here is one way the process can go:
Initial Contact
Once a purchaser reaches out to you, if you are interested, we suggest both parties sign a non-disclosure agreement (NDA) to protect their interests. These negotiations can be an indication of how future interactions play out.
Once an NDA is signed, the next step is to arrange a short meeting to assess fit. This is a good time for you to share some general information about the business, including scale and profitability. After, we would advise that you request a high-level range of what the purchaser is willing to pay. Moving forward with discussions only makes sense if their offer matches your expectations.
Timeline and milestones
To keep everyone focused and on track, we recommend nailing down a timeline with concrete milestones that will help both parties determine whether the process should continue or be terminated at each stage.
Sharing of information
The next step is to work toward creating a letter of intent (LOI). For this, the purchaser will generally ask to see some specific information. It is important for you, at this stage, to assess what is appropriate to share, especially in terms of any proprietary or customer information. With that said, you must provide enough detail for the purchaser to provide a meaningful offer. In our experience, the best information packages at this stage are concise and reference aspects of the business that would impact the potential purchaser’s interest and pricing.
Letter of Intent
After the purchaser has reviewed the information provided, negotiations on an LOI begin. There are different approaches to this; we prefer the LOI to contain most (if not all) the provisions that will materially impact the deal, including both business and legal terms. While the LOI is not binding (i.e., legally enforceable), it serves as the basis for the actual sale agreement.
Confirming due diligence and sales agreement
Though a lot remains to be done, by this point the price and business terms should effectively have been finalized. Next steps would include confirmatory due diligence, where the purchaser validates the information provided, followed by corporate record and tax information review and the drafting of the purchase and sale agreement. We cannot stress enough how important it is to have a good M&A lawyer for these processes.
As you can see, selling a business is a complex process with many interconnected steps. While unsolicited offers can help bypass the process of finding a purchaser, they still require effort and time to achieve optimal results.
The information presented above is a limited list of considerations in a sales process. It is important to have qualified and experienced representatives on your team. At Smythe Advisory, we specialize in valuing businesses and managing M&A processes. If you’re interested in knowing more, please reach out to a member of our team today.
- Arthur Klein is a manager and M&A advisor with Smythe LLP, a leading professional services firm with locations in Vancouver, Langley and Nanaimo, B.C. visit www.smythecpa.com
