Unsolicited offers tend
to come at inopportune times. While some
are actually opportunistic, most come out of the blue when the potential seller
is not ready to receive them. Unsolicited
offers for private companies tend to come from immediate competitors, customers
or suppliers and, these days, private equity is also actively searching for new
platform investments.
If unsolicited offers
are common in your sector, here are some considerations to keep in mind.
Be
prepared
- if you are in a position to bring other credible buyers into the process
quickly you will gain substantial negotiating power. To accomplish this you should already be on other
potential acquirers’ radar screens. Make
them aware of your capabilities, your value proposition and explore OEM /
distribution relationships. When
multiple buyers are brought into the process, the negotiating power shifts
significantly toward the seller, who can use a competitive process to maximize
valuation.
Keep
your options open as
long as possible - a Letter of Intent (“LOI”)
will almost always include an exclusivity clause. This is because a signed LOI is an agreement
in principle and expensive external resources (accountants and lawyers) will
now be engaged for due diligence and closing the transaction.
Exclusivity means the seller cannot engage in terms discussions with any
other party for the agreed upon period. This
shifts the negotiating power to the buyer.
If the buyer finds material valuation issues during due diligence and
seeks a price adjustment, the seller has no recourse other than to compromise
on terms or walk away from the deal.
Focusing
on a single buyer does not necessarily save time – sellers sometimes
shy away from a formal process based on the amount of time and effort it will
take. However focusing on a single buyer
does not always result in reduced effort. A buyer in an open-ended,
uncompetitive situation will often continue to ask for more and more detailed
information exhausting the seller in the process.
Perform
buyer due diligence – what is the buyer’s long term strategy? Is the buyer well capitalized or
over-leveraged? If the buyer is a private equity group, what is their typical
'hold time' until a company is resold? If
the offer includes a note or an earn-out, the seller assumes buyer and/or performance
risk.
Bring
an independent advisor into the process - unprepared
companies tend to assemble requested materials in a rushed manner and answer
questions ad hoc without a well formulated strategy. By bringing an independent M&A advisor into
the process you immediately formalize the process and create additional
options. Introducing actual or
threatened additional buyers into the process will likely result in the initial
buyer raising its offer.
When you accept an unsolicited offer, most of
the time you will leave money on the table compared to an offer arrived at
through an auction process (even a limited one). By acquainting yourself with the potential
buyer universe and working with an independent advisor, you can quickly bring
other interested parties into the process and improve your outcome
substantially.
Derek van der Plaat, CFA has
worked in private market M&A for more than 20 years and is a Managing
Director with Veracap M&AInternational in Toronto.
