How Business Owners Can Respond to Unsolicited Offers

The purpose of this article is to provide guidance to business owners who have received an unsolicited bid for their business and who have not prepared the traditional materials in advance of a solicitation.

Before we get started, it’s worth recapping our prior post, “The Pitch Book: Materials You’ll Need to Sell Your Company.” As previously mentioned, we believe that having professionally prepared investment materials—also referred to as confidential information memorandum (CIM)—is one of the most critical aspects to successfully selling your business. CIMs help a business owner in three critical ways:

1. Speed – you don’t have to answer the same questions again and again from different buyers
2. Valuation – you have an opportunity to assert and defend the valuation that the business should fetch
3. Appearance / Presentation – having a CIM shows Buyers you are serious about selling and are prepared; this is critical to getting them to take the opportunity seriously

One major additional benefit of the CIM is that it lets you control the initial story and positioning of your business while also explaining negative issues on your own terms. Again, for a more detailed discussion on the benefits of having a CIM, please review our last post.

Can Deals Still Get Done Without a CIM?

While it’s important to have a well-prepared CIM, deals still get done without them. You may sometimes hear about a business owner that recently sold their company to a buyer with little prep work. Of course, there will be cases in which companies are sold with no marketing materials or with no representation, but those examples are the exception and not the rule. You shouldn’t expect to get the same results: the odds are stacked against you, and even if you close the deal, you’ll almost definitely be leaving money on the table. Put yourself in the buyer’s shoes: you send an unsolicited bid to a company you want to buy, you then learn that they have no representation and no prepared materials, and that they likely have no other interested buyers involved. That’s an incredibly attractive negotiating position for the Buyer to be in. As the seller, you can navigate this successfully, but you’ll be the exception that proves the rule.

What Should You Share With A Buyer?

So, what happens if you’ve been approached by a buyer and you don’t have a CIM and you don’t have a banker helping you? At a minimum, you should be prepared to start producing some “just-in-time” deal materials such as high-level financials, operational information and marketing collateral in a manner that satisfies the buyer’s request. But to do that, you’ll need to understand the potential buyer to know what type of materials the buyer will likely need.

Before Sharing Information—Study the Buyer Types

With any buyer, whether they are strategic or financial, it’s critically important to understand their goals and motivations when sharing information. This can make a significant difference in moving a transaction along and securing high and sustained interest.

Strategic Buyers

Let’s say your company manufactures a proprietary product that’s protected via highly-engineered processes; let’s also assume a strategic buyer manufacturers a somewhat similar product, only theirs is more generic. The product made by the strategic buyer has become less valuable in the marketplace and, as a result, their profit margins have been decreasing. The strategic buyer may know your company very well since they manufacture similar products (though they’re not the same type of products and don’t have the same proprietary elements) and may interact with your business at trade shows or hear about you from overlapping customers. You don’t consider them a competitor, but believe there are synergies—maybe similar cost structures, management teams, customers, etc—between the two companies since you both manufacture somewhat similar products. In this case, the strategic buyer may decide to enter your market and determine the best way to do so is through an acquisition. In general, you should be prepared to share the following with a strategic buyer:

• High-level financials (preferably five years of historical data with one or two years of projections)
• Blind summary of your client base
• Blind summary of your supplier base

Keep in mind when you share information with a strategic buyer, they probably already know your industry and maybe your company quite well. So, they’ll be less interested in reviewing marketing information such as company brochures; they’ll primarily want to see your financials and better understand your client and supplier base and any R&D efforts that you have. That doesn’t mean you have to share with them detailed financials and reveal specific names of your clients and suppliers. There are creative ways to keep this information blind, but in general you should provide the following regarding financials:

• Income Statement: summary of revenue, cost of goods sold, gross profit, selling, general and admin expenses, depreciation and amortization, interest expenses, net income and adjusted EBITDA for the last five years.
• Balance Sheet: summary of the company’s assets (current and long-term), liabilities (current and long-term), and equity over the last five years.
• Cash Flow Statement: cash flow from operations, cash flow financing activities, and cash flow from investing activities for the last five years.

When we say high-level financials, we mean high-level. Don’t share every line item of expenses and breakdown of sales—just a summary of your company’s financial performance. Also, instead of revealing every name of your clients in your customer base, you can say that your company serves a range of customers across a variety of demographics. Because the strategic buyer may be a competitor or entering your market very soon, you need to keep customer information vague, but provide enough information to let them understand your business. Often, experienced investment banks can help you make the right judgment call here. You should ask one, even if you haven’t retained them officially.

Financial Buyers

For simplicity, let’s use the same example again where your company designs, manufactures and sells proprietary widgets. A financial buyer like a private equity group isn’t in the widget business and they don’t have any holdings in your industry, but they recognize that the market is rewarding (high margins) companies which manufacture proprietary widgets quite handsomely. Furthermore, the private equity group has a ton of capital to invest and they must put it to work in high-quality companies. Given this structure, it’s quite likely that the financial buyer is primarily interested in:

• Financial performance
• Capital structure (how your company is financed: debt and/or equity)
• Growth opportunities
• Competition
• Exit Scenarios

What the financial buyer is looking for is how they can sell your company in five or ten years at a higher value than what they might pay for it today. They’re less concerned about strategic synergies (though they may be interested if they have a portfolio company that is similar to yours). That’s not to say that a financial buyer adds tremendous value to your company after they purchase it. They may indeed restructure your business, institute a new management team, set up operational systems, and so on. Just remember their primarily goal is to exit the business at some point in time. Given this structure, it’s common to share the following information with a financial buyer:

• High-level financials (preferably five years of historical data with five years of projections)
• Company brochures or any other marketing material
• Overview of your competitors
• Estimate of growth potential and/or additional markets to sell products/services

You can see that both sets of buyers are seeking roughly the same information. Notice, however, that a financial buyer will want to see longer-term projections on your company and more qualitative information such as marketing materials. Don’t let this concern you, though, when you decide to explore a sale. Financial buyers can be just as competitive as strategics when valuing your company.

Summary

We hope that this articles teaches you and warns you about one thing: attempting to sell your company with no formal material in place is very dangerous and even more time-consuming than using a more systematic process. You’ll be forced to study the buyer types on the fly, assemble material in a rushed manner, answer questions piecemeal, and be concerned about revealing sensitive information. However, we know that deals still can occur this way, so we thought it would be helpful to highlight the best ways to scramble into a reasonably safe and defensible position. For additional reading, David Cohen of Techstars has prepared a 10 step list for entrepreneurs called You have acquisition interest – now what? where he outlines what to do when a potential acquirer approaches you to buy your company.