Beware of Unsolicited offers? Handle with care

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If you receive an unsolicited approach from another company offering to buy your business, don’t react too quickly. Unsolicited offers can be very flattering, particularly so if received from a larger, well-known company. Unfortunately, in many cases, the end result is that the eventual sale price is far below both the original offer and the real value of the business.

For business advisers such as Evolution CBS, this is a particularly frustrating scenario as we have to point out the potential pitfalls to the seller at a time when they are highly positive about the potential outcome. I’ve met several business owners who have found themselves in this situation and were tempted by the high initial figures being discussed.

Your potential buyer might be a wolf in sheep’s clothing! Using a ruse to obtain know-how / product information / details of IP / staff and customer information etc., packaged as an offer but with no intention to actually buy the business. In one particularly sad case, a recruitment company had been approached and, in good faith, had parted with a considerable amount of information and even given the buyer access to their corporate database. Four months later, with its business information now in the hands of a competitor, the buyer disappeared off the radar leaving the seller with a seriously damaged business.
In another case, where thankfully we met the seller at an early stage, an unsolicited approach had been received from a competitive company that wanted to undertake some “light due diligence”. We were able to advise the seller of the considerable risk involved.

I would imagine that most readers are shaking their heads right now, thinking that this is fairly obvious. Well, yes in one way it is. But the real danger in these situations is in what’s happening to the target business as these “negotiations” roll out.

Even supposing that the offer is from a reputable company (it does happen) two things will have happened to you:

1. You will have relinquished a degree of control in the situation. This is a one-horse race and the winner is the buyer; he holds the trump card – take it or leave it! Your buyer is now controlling the timeframe of the transaction.
2. You will, almost immediately, start to take your eye off the business. The process of selling a business is extremely time-consuming. Dealing with the considerable extra workload will put additional strain on your resources which will, almost inevitably, affect the performance of your business.

So what’s the best way to handle an unsolicited offer?

Firstly, is it really an offer? If it’s not in writing, then it’s an expression of interest – nothing more. So the first thing is to get the offer and the terms of the offer in writing. At this stage you should not divulge any company information.

Next thing to do is to get a signed confidentiality agreement. Your lawyer will prepare this for you. Once this is in place you can provide some limited financial information, typically 3 years annual accounts, your annual budget and a 2 year financial forecast.

In the meantime, you should get a professional business valuation. This has 2 benefits – you will know the value parameters and you will be in a position to decide whether this is sufficient to meet your ongoing financial needs. You will also have time to research what resources will be needed to conclude the transaction should you decide to proceed.

Assuming your potential buyer has put the offer in writing, don’t be in too much of a hurry to accept. You need time to consider your options before you enter into the due diligence process. Be aware that if you proceed you will almost certainly not realise the true value of your business. Why? Because there is no competitive tension in the deal; your buyer knows that he’s the only game in town. During due diligence the offer price is likely to be reduced – bear in mind that most buyers are experienced and will have a purely commercial view of the transaction whereas you may not have sold a business before and you will, without doubt, have emotional reactions to the process as it continues. At this stage the buyer may ask you to sign an exclusivity agreement to protect his interests but this is not advisable at this stage.

Now you must decide whether to instruct an adviser to handle the sale for you. If you do, you can instruct your adviser to find alternative buyers so that you are in a better negotiating position.

If your buyer is holding back from providing a formal written offer you may wish to advise them that have instructed an adviser to handle the process for you and that you may instruct your adviser to research other potential acquirers.

You will also need to instruct your lawyer (and please use a lawyer that has experience in business sales and acquisitions) and also advise your accountants.
The biggest mistake you can make in this situation is to transfer your focus to selling the business rather than running it. What happens if your business suffers a downturn and your buyer walks away? It will have cost you money in legal and financial fees and the value of your business will be reduced. This is particularly true of private owner-managed businesses where the owner has multiple responsibilities.

Think carefully before you respond to an unsolicited offer, no matter how tempting it appears initially. Do you want to sell your business at this time? When was the last time you had it valued professionally?

Don’t do anything or divulge any information until you have a formal written offer and a signed confidentiality agreement. If your buyer refuses to provide this, then this is not likely to be a viable transaction and, difficult at it may be, you should walk away before you lose money and potentially damage your business.

If you have received an unsolicited offer and would like to discuss your options, please call us for a free consultation.

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