You probably get calls every week from people trying to buy your business.
And part of you might be tempted to entertain them. The allure of a “quick sale” without the need for an intermediary is attractive.
Could it really be that easy?
Unfortunately, yes - it can be that easy. But often what’s easy is not what’s best for us. It’s easy to sit on the couch and eat Cheetos, but it’ll also leave you looking like Fred Flinstone.
So, if you're getting phone calls from buyers looking to purchase your business, beware - the callers are after one thing: a proprietary deal.
Let’s dive in further and discuss the concept of a proprietary deal and the dangers of an unsolicited offer.
What Is An Unsolicited Offer?
An unsolicited offer is an offer you receive when your business is not actively listed for sale. It comes out of the blue and is usually initiated by a sophisticated buyer like a Private Equity Group (PEG) or a strategic buyer.
These buyers like unsolicited offers because if you accept, you are granting them the exclusive right to consider purchasing the business - this is what we call a proprietary deal.
The Proprietary Deal
A proprietary deal is one where the option to buy your company is exclusive to one buyer. The buyer benefits from this because they know they are only competing with themselves, which provides them with more negotiating power.
Why is this dangerous for business owners?
Not all, but some buyers play games with their offers. The buyer might submit an LOI (which is a non-binding agreement) with an inflated purchase price and put a few days on the expiration date to get you under contract quickly.
If you accept, the next play in their game is to try and uncover something “unexpected” or “unflattering” about the business during due diligence. Maybe a nasty insurance claim, a key employee with a criminal background, or a mistake in the financials that impacts the true earnings of the business. As part of due diligence, they may also ask to speak with key employees.
At this point, the buyer has the fuel they need to come back and renegotiate the terms based on their findings in due diligence.
Let’s take stock of the situation: you’ve shared all your company’s private information, are emotionally committed to selling the company, and have potentially informed employees of your plans to sell. Unethical buyers will use this as leverage to renegotiate terms in their favor.
You may think it could never happen to you, but it’s a horror story for a reason - several owners have been through it.
So, to avoid this kind of outcome, what should you think about after receiving an unsolicited offer?
8 Things to Consider When You Get an Unsolicited Offer
1. What’s in it For The Buyer?
Consider what accepting an LOI will actually give you as the seller:
Seller’s Benefit - Nothing (generally).
Buyer’s Benefit - Exclusivity (you can only negotiate with them for 90 - 120 days),
due diligence access (access to records to perform their DD), and the ability to walk away at any time.
Accepting an LOI does not mean money in your pocket. Even if they offer earnest money, it’s highly unlikely you will ever see a dime. For the buyer, letting an attorney hold their money for 90 days is a small fee to pay to look into a competitor or a similar business’s books.
2. Do I Have Time to Consider This With my Professional Advisors?
Time does kill all deals, but some deals deserve to die. Do not allow a buyer to pressure you into accepting a deal under their condensed timeline.
You must be given time to consult your professional advisors to review the buyer’s offer. If they’re not willing to extend you that time, that’s a major red flag.
3. Does The Buyer Think There’s No Competition?
The kryptonite to a proprietary deal is competition. If a buyer feels they are the only game in town, they’ll use that knowledge to their advantage. That’s the worst-case scenario for the seller.
A useful tactic you can employ is to tell the buyer who gave you the unsolicited offer that you will consult with your business broker and then get back to them. Even if you don’t have a broker yet, this is a good way to apply some pressure and weed out buyers looking for inexperienced sellers.
However, it’s always better to have actual competition. When you have an attractive opportunity, this is the best leverage available. That’s why we never suggest accepting an unsolicited offer.
4. Do You Know What Your Company is Worth?
It’s simple - do you really know what your company is worth? Do you know how companies are valued? If not, how can you be sure that you’re receiving a good offer?
Getting a business valuation done gives you an idea of what the company is worth. While no one can tell you its exact value, an experienced business broker or valuation company should be able to give you a very close estimate.
5. It’s Not All About Purchase Price
Although the purchase price is important, there are other terms that can affect the value of a deal. Consider these things:
- Is the offer a stock or asset sale?
- Is the buyer asking for working capital?
- Do you know how to calculate working capital?
- Do you know what an exclusivity period is?
- What is the non-compete?
- Does the offer cover purchase price allocation?
- Have you agreed on a training period?
- Is the buyer asking for you to finance a portion or roll over your equity?
These are just a few examples of important points to negotiate outside of the purchase price that can affect the take-home value of the deal.
As an example, If you do not know how purchase price allocation affects your taxation, the buyer can sway the allocation in their favor to reduce their taxation, while disproportionately increasing your taxation.
6. What Are The Risks to Your Confidentiality?
Some sellers may be tempted to accept an unsolicited offer because they view it as less of a risk to their confidentiality. After all, instead of marketing their business for sale with the chance of word getting out, only one buyer would know they are selling.
There is some validity to this, but there are still risks to your confidentiality, even with an unsolicited offer. For instance, a buyer may:
- Want to meet with certain employees before closing
- Require onsite visits to perform due diligence
- Use an unsolicited offer to fish for information about your company
Accepting an unsolicited offer is not devoid of risk to confidentiality since there are a ton of opportunities for confidentiality to be breached after an LOI is accepted. The best way to protect yourself is to have an attorney and a business broker assist you in the process of selling.
7. Do You Know What a Letter of Intent (LOI) is?
A letter of intent (LOI) is usually non-binding, which means that if things come up during due diligence, the buyer can decrease their initial offer.
In the case of an unsolicited offer, you should be extra cautious about agreeing to an LOI. By accepting you are giving them exclusive access to your business and the permission to go through all of your records and information during due diligence.
To ensure you do not agree to the wrong letter of intent, you should consult with your attorney and business broker before moving forward. Learn more about what an LOI is in our blog “What is a Letter of Intent? (What You Should Know Before Signing One).”
8. What’s The Best Course of Action When Receiving an Unsolicited Offer?
If you are truly interested in selling and you get an unsolicited offer, you need to tell the buyer that you have engaged a merger and acquisition (M&A) company to assist you in this process and that they will be reaching out on your behalf very soon.
After you do that, engage an M&A company for professional help and put them in touch with the buyer. The M&A advisor will be able to help you with things like:
- Business valuation
- Determining if the offer you have received is legitimate/possible
- Creating competition amongst buyers to increase the sales price
- Mediating conversations and negotiations between you and the buyer
- Representing you and working in your best interest (as directed by you)
An M&A advisor can help you with all parts of the selling process and ensure that you are not left wondering if you got the best deal for your business.
Properly Assess Your Unsolicited Offer
With the knowledge of what an unsolicited offer is, how it benefits the buyer, and how you can protect yourself against a bad one, you can make a more informed decision.
Just like few people would want to represent themselves in court, you will probably not want to represent yourself while selling your business - simply due to the level of difficulty.
To make the process of selling your business easier, you should assemble a deal team of trusted advisors. Learn everything you need to know about deal teams in our blog “Who Should be on Your Team of Advisors When Selling Your Business?”
If you have been getting multiple unsolicited offers and are starting to think about selling, give us a call. We can provide you with a second opinion so you can make the right decision for you and your company.