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June 2002 Beware of unsolicited purchase offers Once you become committed to a single deal without a backup, you lose significant negotiating leverage Since the early 1990s, 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. They know that if they can find the idea situation – where they have no competition for a good acquisition target – then they can get a much better deal. As a potential seller, you should understand this market dynamic as well. Unsolicited offers. You may routinely receive letters that say something like this: “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 may sound tempting, but it is usually a façade. As opposed to singling out your company, the sender probably wrote to many companies in your area and/or industry, regardless of “the quality of the operation.” Even if the inquiry were sincere, there can be numerous pitfalls if you choose to sell your company directly to someone based on an offer that comes from out of the blue. Preparation. Your business is probably your most significant asset, and selling it may be the most significant financial transaction of your life. You and your business need to carefully prepare for this transaction in advance, not on the schedule of a buyer. You should think through your succession goals, as well as understand your emotional, financial and estate needs. Address in advance the broad range of family, ownership, operational, competitive, and risk exposure issues. Further, since the real value of a typical business is its future value, it is vital that you be able to articulate – qualitatively and quantitatively – the company’s vision of the future. Even if you have decided that you would consider selling your business, and even if you have gone through a thorough process of preparing, and even if the potential acquirer is financially qualified and sincere (a lot of “ifs”), you will be still setting yourself up for some big question marks. No shortcuts. The potential buyer will tell you that the process will be quick. That your customers and employees will know nothing of the sale until it’s done. 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 an established business that you have built with great effort and care and represents a significant portion of your net worth? In our experience, the main reason not 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. Second, you will very likely get a lower price than in a more competitive sales process, even assuming that the unsolicited offer is from the most qualified organization to buy your business (an incredible coincidence). Don’t forget, despite today’s seemingly unfavorable market conditions, it is still a long-term sellers market. Once you announce you are going to sell, and you become committed to a single deal without a backup, you lose significant negotiating leverage. An unsolicited offer to buy your business may cause you to stop and reevaluate where you are in your life. If the time is right, or will be soon, begin preparing. Get advice from your trusted advisors and the perspective of experienced M&A professionals. You may sell only one business during your career, and the success of that transaction will help determine what kind of life you will enjoy from that point forward. Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market. |