How to Handle an Unsolicitied Acquisition Offer

If you run a profitable, growing business of any significant size you will eventually receive an unsolicited offer to buy your company. It happens to everyone. But the way you react to the offer can change the future of your company – and your future at your company.

Many firms who send out unsolicited offers fall into one of two camps: they’ve either been eyeing your company for quite some time and are ready to make a move or, more likely, they’re fishing for companies that are undervalued. Understanding how to respond to an unsolicited offer can help you avoid being an “undervalued acquisition.”

1) How much interest is there from the offering party?

One quick way to understand the level of interest in your company is by better understanding who is doing the offering. If you’re contacted by the CEO of the potential acquirer there’s a very good chance they have interest in your business. If the contact is the Executive VP of Corporate Development, there’s a decent shot they may have some interest. But, if you’re talking to a junior corporate development associate or anyone else who doesn’t have board-level access the offer is most likely exploratory at best.

Also, be very careful to listen to what the other person is telling you. Are they saying they’d like to acquire you or are they making vague references to “working together” or “potentially partnering”? The differences can be critical.

2) Are you actually ready to sell?

Many times the offer is irrelevant. Are you really ready to sell your business? What will do you if you’re no longer running your business? You need to think long and hard about the reasons why you would sell your business today and not a few years from now. One of the most common killers of deals is when an owner gets cold feet and walks away. The further down the path you get with a potential acquirer before walking away, the less likely they are to approach you again in the future when you’re actually ready to sell.

3) Are you prepared to spend the months it will take to get a good deal?

Even though a company is approaching you with a deal, in what appears to be a neatly packaged offer, every deal takes months to close. But, more importantly, you’re probably not getting a good deal if you simply accept their offer. Even Instagram didn’t take the first offer, rejecting a $300M overture from Twitter in order to take a $1B counter-offer from Facebook. If you don’t test the market, you’ll almost always leave significant value on the table.

One of the best ways to test the market, while keeping the initial offer on the table, is to engage with an advisor who can run a quick process for you so you stay focused on your business. They’ll reach out to other potential acquirers and help you solicit competing deals with different terms. Even if you end up selling to the company who approached you first, you’ll have a better sense for the market value of your company. And you won’t fall into the trap of getting distracted by offers and negotiations. Many businesses have found themselves floundering after their CEOs spent too much time on negotiations that never materialized.

4) Do you have a clear understanding of what you need in a deal?

Without taking the time to clearly lay out your minimum requirements, before negotiations get emotional (and they will at some point), you will either end up blowing up the deal or will end up in a situation that is less than ideal. Some of the factors to consider are:

• How much cash up front do you need?

• What percentage are you willing to postpone as an earn out? Is that stock vesting or milestone driven?

• Do you want to be employed by the acquirer after the sale? Under what conditions?

• Which assets do you want to retain? Which employees can or can’t be fired?

• What other projects are you working on that should be excluded in the sale?

• Anything else you would consider critical to getting a deal completed on your terms.

5) Is there someone else who will play the ‘bad guy’ in the negotiation?

In many cases, you’re going to remain part of the operations even after you sell the business, as a consultant, employee or shareholder. If you end up being the bad guy in the negotiations in order to get the deal that fits your terms, the rest of the relationship can end up tenuous. One of the most important roles an advisor plays is to be the “bad guy” on your behalf, ensuring that you get the terms and consideration you deserve without ruining your future relationships.

The last thing your acquirer wants is someone who just rolls over quickly, they’ll fear your ability to represent their company well in the future. At the same time, they don’t want to deal with someone who made their life hell for months as part of the future operations of the company. Let someone else play that role.