Opinion: How to handle an unsolicited offer for your business

Much has been written about what to do if you plan to sell your business in an open market auction process. What is less researched is what you should do when you are contacted by someone who wants to buy your business, even though you had no plans to sell.

While receiving the call is exciting and flattering, how you go about the process can make a huge difference in the outcome.

If you do decide to go seriously with an unsolicited offer, our number one piece of advice is to find a way to take control of the process by creating structure. This gives you the best chance of getting a fair price and good terms.

While every situation is unique, there are certain things to keep in mind when it comes to dealing with unsolicited offers to buy your business:

Who is the buyer?

You may be contacted directly by an interested party or by an outside consultant hired to represent you in a buy-side search. Conversely, a consultant may approach you to represent you in a sale. Sometimes it can be obvious who the buyer is, sometimes it can be difficult to tell who the contact represents.

Buyers can be private equity platforms and financial or strategic investors. Regardless of who they are, they are likely already familiar with the M&A process, giving them an edge in negotiations and outcomes. In order to create a level playing field, it is important that you prepare yourself and your business to maximize your value on the best terms.

know your worth

If you know the value of your business, you can better assess whether the price offered is fair or whether you need to negotiate a higher price. Chartered Business Valuators (CBVs) are well placed to advise on this and provide a formal business valuation or price analysis.

Control the process

If you are the party being approached, it is important that you exercise control of the business rather than taking the initiative. If you have no experience selling a business yourself, it is a wise idea to hire financial and legal advisors with proven M&A experience.

Here’s one way the process can go:

first contact

Once a buyer contacts you and you are interested, we encourage both parties to sign a non-disclosure agreement (NDA) to protect their interests. These negotiations can be an indication of how future interactions will unfold.

Once an NDA is signed, the next step is to schedule a brief meeting to assess eligibility. This is a good time for you to share some general information about the company, including its size and profitability. After that, we recommend that you request a high range of what the buyer is willing to pay. Driving conversations only makes sense if the offer meets your expectations.

Schedule and Milestones

To keep everyone focused and on track, we recommend establishing a timeline with specific milestones that will help both parties determine whether to continue or exit the process at each stage.

Sharing Information

The next step is to work towards creating a Letter of Intent (LOI). To do this, the buyer will usually ask for certain information. At this stage, it is important that you assess what is appropriate to share, particularly with regard to proprietary or customer information. With that in mind, you need to provide enough detail to allow the buyer to make a meaningful offer. In our experience, the best information packages at this stage are concise and reference aspects of the deal that would influence the potential buyer’s interest and pricing.

letter of intent

After the buyer reviews the information provided, negotiations for an LOI begin. There are different approaches to this; We prefer that the LOI contain most (if not all) provisions that materially affect the transaction, including both business and legal terms. Although the LOI is not binding (ie legally enforceable), it serves as the basis for the actual sales contract.

Confirmation of due diligence and purchase agreement

While there is still work to be done, the price and terms and conditions should be finalized by this point. The next steps would be a confirmative due diligence where the buyer validates the information provided, followed by reviewing the company paperwork and tax information and drafting the purchase and sale agreement. We cannot stress enough how important it is to have a good M&A lawyer for these processes.

As you can see, selling a business is a complex process with many interconnected steps. While unsolicited offers can help bypass the buyer search process, they still require effort and time to achieve optimal results.

The information presented above is a limited list of considerations in a sales process. It is important to have qualified and experienced representatives on your team. At Smythe Advisory we specialize in valuing companies and managing M&A processes. If you’d like to learn more, contact a member of our team today.

• Arthur Klein is a manager at Smythe LLP, a leading professional services firm with offices in Vancouver, Langley and Nanaimo, BC. Visit www.smythecpa.com