10/11/2005
Sellers Beware: The Unsolicited Proposal to Buy Your Company

By LARRY MAKER, BS, BA, CA, Soberman Maker & Associates Inc. Larry is also Managing Director of the BKR International Mergers & Acquisitions Group Toronto office

Over the last ten years, there has been a dramatic increase in the interest of professional investors and large companies in the acquisition of privately-held companies.

Despite the difficult conditions of today’s capital markets, there are still more quality buyers than there are good companies to buy. Smart buyers certainly understand this market dynamic, and they are always on the lookout for businesses that are not for sale. These buyers know that if they can find the “dream situation,” where they have no competition to buy the business, then they can get a much better deal. Smart sellers, obviously, should also understand this market dynamic.

If you are the owner of a business, you may get letters (some types of businesses get them regularly) that say:

Our organization represents a major company in your industry with significant resources. Our client has been impressed with the quality of your operation and has asked us to inquire if we can meet with you to determine if you would be amenable to discuss a possible acquisition.

It sounds tempting, but it is usually a façade. As opposed to knowing your company, the letter was probably sent to all companies in your Standard Industry Classification (SIC) code regardless of “the quality of the operation”.

Even if it were not a façade, there can be numerous pitfalls for an owner that chooses to sell his company directly to someone based on an unsolicited offer that comes out of the blue.

The privately-held business is often the most significant asset of its owner. The sale of that business is probably, therefore, the most significant financial transaction of the owner’s life. You and your business need to carefully prepare for this transaction in advance, not on the schedule of a buyer.

As a business owner, you need to think through your own succession goals, as well as understand your own emotional, financial, and estate needs. You need to make sure that a whole range of family, ownership, operational, competitive, and risk exposure issues are addressed in advance.

Furthermore, since the value of most businesses lies in their future value, it is vital that the owner be able to articulate qualitatively and quantitatively the company’s vision of the future.

Even if you have decided that you would now consider selling your business; even if you have gone through a thorough process of preparing; and even if the potential acquired is financially qualified and sincere (a lot of ‘ifs’), you will still be setting yourself up for some big question marks.

The potential buyer will tell you that the process will be quick. He will tell you that your customers will never know until it is over. Your employees will not know until it is over. He will tell you that you can shortcut this emotion-filled process. It sounds very enticing, but experience demonstrates time and again that it is the wrong way to go.

Since when is “selling it quick” the objective of the sale of an established business which you have built with great effort and care, and which represents a significant portion of your net worth?

In our experience, the main reason it is wrong to get involved with an unsolicited offer is that, in most instances, you will never be truly prepared, and the process can be more disruptive than you anticipated.

Secondly, you will very likely get less of a price than from a more competitive sales process, even assuming that the unsolicited offer is from the most qualified organization to buy your business (which would be an incredible coincidence if it were). Don’t forget, despite market conditions, it is still a long-term sellers market.

Finally, even if the selling price were equal to that which results from a more competitive process, once you announce that you are going to sell and you become committed to a single deal without backup, you lose significant negotiating leverage. This is especially true in the vital terms and conditions of the agreement, including, perhaps, being stuck with onerous warrantees and indemnifications.

An unsolicited offer to buy your business may cause you to stop, think and then re-evaluate where you are in your life. If you think the time is right, or will be soon, begin preparing, get advice from your trusted advisors and the perspective of experienced Mergers & Acquisitions (M&A) professionals.

You will probably sell only one business in your life, and, as we said before, it is probably the most important financial transaction of your life. You don’t want to mess it up.

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.