Navigating Buyout Offers in Business: The Unexpected Knock on Your Door

Imagine you receive an offer to buy your company out of the blue. These situations are more common than you might think and being unprepared can lead to missed opportunities or unfavorable deals.

Stage 1: Identifying Serious vs. Non-Serious Buyers

When approached with a buyout offer, save time by distinguishing a serious buyer from a non-serious one. This determination guides how much effort and resources you invest in the potential deal.

Evaluating Buyer Seriousness

Review Past Acquisitions and Financial Health: A serious buyer often has a history of relevant acquisitions and solid financial backing, evident in their readiness to disclose financial capabilities.

Strategic Fit and Due Diligence: Genuine buyers usually have a clear strategy for integrating your company into theirs and are proactive about conducting thorough due diligence.

Maintaining Confidentiality

Safeguard Sensitive Information: Use non-disclosure agreements (NDAs) during initial discussions to protect your company's confidential data and gauge the buyer's commitment. Buyers unwilling to sign NDAs may be fishing for information. You do not need to disclose confidential details until you are readyl

Signs of Non-Serious Buyers:

Vague Plans and Financial Ambiguity: Watch for buyers with unclear intentions for your business or hesitant to discuss financial backing.

Irregular Communication: Sporadic or unprofessional interactions can be indicators of a lack of serious interest.

Stage 2: Managing Relationships with Potential Buyers

Serious buyers may merit additional time investment on your part. For buyers that are on the fence (often, more conservative acquirers may need additional time or information before making big investments), keep communication lines open.

Maintaining Personal Connections: At the heart of every deal, you’re still selling your business to a person or group of individuals, who will run the company their way. Make sure you’ll be comfortable selling them (and all the implications for your employees, customers, suppliers, etc).

Maintain Effective Communication: Keep potential buyers engaged with regular updates about your company's progress, especially if discussed in early meetings, but be cautious about oversharing.

Explore Multiple Options: Don’t rush into the first offer. Consider multiple buyers to ensure you're getting the best value and fit for your company. For some buyers that are looking to quickly close an acquisition, be mindful this process doesn’t alienate them. If they are willing to structure a favorable deal for you, it may be worth exploring their offer further before rushing a M&A process.

Stage 3: Maximizing Potential

Continue to Focus on Your Business: Continue to concentrate on your business operations. A thriving business is more attractive to buyers and can increase your company’s valuation. We’ve seen deals fall apart mid-diligence as owners “take their eyes off the ball” and the business deteriorates, which may lead to a less-than-acceptable acquisition price.

Balance the Sales Process with Business Operation Needs: At the same time, a lack of deal momentum can kill buyer interest. During due diligence (after a negotiated offer), as the buyer evaluates your company, ensure you have your financial data and operational data ready for their M&A team to digest. Waiting too long between due diligence requests can cause buyers to call off the deal.

Seek Expert Advice: Just as you wouldn’t go whitewater rafting without an expert guide, a qualified M&A advisor can provide invaluable expertise in representing you during negotiations and managing the diligence process to get the deal done in your favor.

Stage 4: When to Engage an M & A Advisor

M & A Advisors can be helpful when a business owner wants:

General Knowledge and Expertise: A proven M & A advisor can answer questions, share knowledge and experience and help you get comfortable with the process

Expertise in Closing Deals: Advisors bring crucial knowledge for deal structuring, negotiation, and valuation.

Faster Sale Process: Advisors handle the complexities of the transaction, allowing you to focus on running your business.

Guidance Through the M & A Process: Advisors help navigate the transaction, ensuring you are making informed decisions

Access to a Broad Network: Advisors often have extensive contacts, increasing opportunities for finding the right buyer when exploring alternatives. Prospective buyers also engage more readily with advisory outreach than direct from business owners.

Closing: Advisors are instrumental in aligning interests and addressing challenges to successfully conclude the deal.

Navigational Expertise: Advisors provide strategic planning, market insights, and legal and financial advice.

However, business owners may face challenges with:

Finding the Right Advisor: Advisors should align with your industry and business needs, and have an extensive track record of representing clients in closed deals.

Risk of Poor Advice: Inexperienced advisors might provide inadequate or misleading advice, potentially jeopardizing the deal. We’ve seen deals go south on bad advice from advisors, often leaving owners with no deal at all or at a significantly reduced price with other buyers later on.

Increasing Fees: Advisor fees, often a percentage of the sale, can become significant as deal size increases. In the lower middle market, we’ve seen business owners use Lehman or Double Lehman Scale to align advisors’ interests while minimizing costs as deal size increases.

Potential Conflicts of Interest: Advisors may have pre-existing relationships with buyers, leading to possible biased advice. Ensure advisors interests are aligned with yours.

The Knock on the Door