Dealing with unsolicited bids
How to handle an unsolicited approach from a company that is interested in buying your knowledge economy firm.
Handling Unsolicited Bids
So, you’ve been approached with an offer for your company, what next? Firstly, you are right to take it seriously, even if a deal is not progressed there is a lot to be learned about your value in the market and the process you will go through at some stage in the future. If not now, they may be the eventual buyer, so the development of goodwill is no bad thing. However, you need to be in the driving seat, not them. Logic needs to drive your actions, not emotion.
You may or may not have an existing relationship with the buyer, but there are risks to consider and manage on three levels before you start to share information
- Who are you dealing with?
- Seriousness of intent
- Competitive consequences
Who are you dealing with?
At the company level, are they a savvy serial acquirer, or an inexperienced buyer, and how deep are their pockets likely to be? Having knowledge of these things up front will be informative in terms of the level of professionalism/expertise they have in running a deal process, the prices they may have paid in the past, and whether there is any possibility of cash up front in a deal. We assume you will want cash up front, and if there is little prospect of that because of their size or way of acquiring, then better to know straight away.
Seriousness of intent
Are you dealing with the commercial decision maker who can sign-off the internal business case, or a divisional head who may be fishing and has not got a mandate? Therefore, in the first meeting it would be good to establish the nature of the mandate and the decision-making process. We had a case where a firm had gone through 6 months of negotiation with a trusted contact, the Sale and Purchase Agreement had been produced, then shortly before the deal was going to close they met with the CEO for the first time, who then said he would not pay the price negotiated, the deal was aborted.
The moment you start to share information you are giving away a lot to a potential competitor. Clearly this may not be the case with your buyer, but what if a deal does not happen? You have shared details about your clients, employees, strategy and financials, then the deal does not happen and they go and buy someone else? Whatever the relationship it is therefore important to get your NDA signed and not to release any substantive information at the first meeting. The NDA should cover you from any potential poaching of staff.
Assuming all is in order, what should be the focus of the first serious meeting?
The first serious exploratory meeting
If you have any gaps or doubts on the above, then the next meeting should cover those gaps, but the first exploration meeting should be focused on two main areas below, both of which need to be covered before agreeing to open the kimono on your company. Covering this ground quickly may avert an extended talking shop. Someone came to us recently with a horror story, he had been in negotiations with a buyer for 6 months and up to then had not been given any indication at all about the price they would pay!
- What is their strategy and how do you fit in it?
- Establish your criteria for a deal
What is their strategy?
Clearly there are some obvious things you will want to know about, like the strength of the company they want you to join, along with their broad growth strategy, where acquisitions fit in that, and specifically their potential acquisition of your firm. However, you also want to understand the broad-brush strokes of the synergies as they see them. What business model will they be operating? Will your brand be closed down and fully integrated with the buyer? Will they be cross-selling into your proposition? Will you cross-sell into the wider buyer propositions, etc. By understanding their answers to these questions, you will gain the high ground in a couple of areas:
- Firstly, you will get a feel for whether the company you will be joining presents an exciting development for you, or will it be square pegs in round holes.
- You will also start to understand your synergy value to them, something you can later use to push your valuation up.
For example, in the deals we run it is usual that we have to force prices higher, it is rare that the first formal bid (this is often different to the numbers used indicatively up front!) is high enough. We increase prices in two main ways:
- We raise the competitive tension by having more than one hungry buyer.
- We also help the buyer make their own business case by modelling the synergy value to them in financial terms.
Establish your criteria for a deal
There are two main things you will want to know more about, financial and non-financial. In other words, what kind of deal they are typically able to put together and what will be your personal positions in the company.
Financial Objectives - There is no point in continuing discussions if the buyer cannot give you the confidence that the deal structure they are able to put together has the potential to make it superior to you financially than the alternative of continuing to grow the company, drawing salaries/dividends/bonus, whilst also improving revenues, profits and equity value. This is particularly important for a company that has a growth history. If you don’t know your current market value, or what it may be after more years of growth, then it will be difficult to know what looks good or bad. If this is the case, then we can help you on this topic.
It is important not to share any financials at this stage. It will set valuation hares running with the buyer that will be difficult to stop and may undermine your true value later. There are major implications on your valuation in the way your business is presented to the buyer and your financials and forecasts need to be properly dressed by an expert before the buyer sees them. After they are presented, they need to stand up to scrutiny if you get as far as due diligence. However, you will want to ask them what kind of size business fits with their strategy and then you can give them a general view of your size and trajectory.
Non-Financial Objectives - What are their views on how you and your staff will be integrated if a deal is done? After all, you have spent X years investing in your company and you will become an employee again! So, you really need a discussion about how they envisage your role in the company, what kind of staff will be let go and those retained. If you do ultimately do a deal, you will want enough control to be able to achieve your ‘earn-out’, while also enjoying life at work. We have seen this go either way – we have sold businesses where CEOs enter straight in as a Partner. Conversely it often happens that owners fail to integrate into the new home, because they’ve been used to entrepreneurial control for so long and can’t cope with being on someone else’s payroll and the associated trappings of oversight, resulting in a preference to walk away and relinquish some or all of their earn-out.
You’ve taken the first meeting and covered the above, so what next?
If you’ve covered all of the above by the end of the first exploratory meeting, it should be enough for you and the buyer to decide – is this worth progressing? If so, you now need advice. Make it clear to your buyer that you are not going to progress any further without an advisor. Then talk to us about how we can help as well as alternative advisors if you want options on who to select. This should not be negative to the buyer, because usually they prefer a well-advised seller as it makes the deal go more efficiently and effectively.