Let's say you are running your business, just doing your thing, and out of nowhere you are contacted by a competitor/financial buyer/complete stranger with an offer to buy your company. Depending on your state of mind, this might seem like an annoyance or a dream come true.
With business valuations at an all-time high, it makes sense for businesses eager to grow through acquisition to do so by reaching out to potential targets directly. Engaging in a one-on-one discussion about selling is sure to yield a better price and terms because it doesn't have the competition of a full investment banking process. I can refer you to the hundreds of TKO Miller blog posts where I caution business owners not to respond to one-off offers from potential buyers, but let's say you get one of these and it sounds so great you want to take it to the next step. What then?
Chances are there will be an aggressive time limit on the offer. Creating a sense of urgency is a tactic that buyers use to force sellers into an exclusive position without having the benefit of consulting with their investment banker. A short timeline will also make the possibility of running an M&A process seem silly because that takes time and there's a perfectly good offer right here and I don't know that I will get something comparable.
This is a long-winded way of saying that short deadlines are a way for the one-off buyer to create leverage. The proper response is not to run around like a frantic chicken and gather financial statements and board minutes, but instead to calmly ask for an extension that will allow you enough time to review the offer with your advisors. The buyer will grumble. Prepare yourself for this. But, if you really are the perfect business for them, they will wait. Don't get crazy and ask them to wait for months, but any real, respectable buyer will give you a couple of weeks to evaluate their offer. If they do not, your radar should be screaming that there is a problem.
2. Meet With Your Investment Banker and Lawyer
Yes, both of these people are necessary if you are really considering the one-off offer. Your lawyer will look for any early legal issues in their proposal. There probably won't be much substance to the offer at this point, so don't be disappointed if your attorney tells you to get a little more information before they can opine fully.
Your investment banker will spend the first five minutes of the meeting telling you that you should run a full sales process to create competition and value. If you press on and are really intent on exploring this one-off offer, your investment banker will relent and look at what you have.
An investment banker may ask you for some preliminary information to do a quick market-based valuation. This can tell you if the price in your offer is in the ballpark of what is market. If the offer you have is too low, that's good to know because you can respond with a reasonable counter offer. If the offer you have is wildly high, that is also good to know. A too-high offer can signal that a buyer just wants to go down the path of an acquisition with you and is likely to change their price late in the process. It can also mean they really want your business and are willing to pay a premium for it. In my experience, the latter case is very rare.
3. Check These Guys Out
After the quick market valuation, your investment banker will spend some time figuring out who this buyer is and what their transaction history has been. There are groups that serially send out offers and complete very few deals (not great buyers to get tangled up with) and there are groups that send out offers and regularly change the price at the last minute (the WORST types of buyers). Even if the buyer is your neighbor that you have known for 20 years, have your investment banker check them out. A really good buyer will have a track record of doing deals and chances are that your M&A advisor will be able to tell if these guys are legit.
Maybe your buyer is a company or group that has never done an acquisition before, what then? That is also a good thing for your investment banker to know. Those groups can be fine buyers, but they tend to stumble a bit when executing on their first transaction. Being new to acquisitions doesn't automatically disqualify a buyer, but a business owner should be aware that things might not go smoothly the entire time.
4. Make a Decision
Proceed With the One-Off Buyer?
If, after doing some checking, you decide to move forward with this buyer, your investment banker will be a key member of your team. Your investment banker will suggest terms and a valuation that are reflective of the current market conditions. Having a banker on your team will also remind your buyer that you're 1) professionally represented and 2) you can turn to a full M&A process whenever you'd like. This preserves some leverage for you as a seller, even though you are talking to one party.
Don't Proceed With This Buyer?
If, after you check them out, you decide not to proceed with this buyer, this is an excellent time to think about life, your business, and your exit strategy. What is it that made you think this was the time to sell? What could be achieved if you ran a full M&A process? If the value was attractive to you, it might be a great time to meet with your wealth advisor and make sure that the price supports your retirement goals.
I write a lot about how business owners should never, ever respond to the "tap on the shoulder," one-off offer from a buyer. In my experience, these are generally a way for a buyer to isolate a seller and create urgency and leverage. However, there have certainly been times when an offer has come to a business owner that is absolutely fair, legitimate, and makes perfect sense for the seller. If you think this is the case, even if you know this buyer very well, run it by your advisors. It will save you some headaches and make things run more smoothly in the long run.