Have you been approached out of the blue by someone interested in acquiring your company?
This experience is not uncommon. Some entrepreneurs will receive unexpected, unsolicited offers on their business several times over the years. In hot markets, this may happen several times per year.
Let’s face it, it’s flattering to be contacted by someone who has researched your industry, says great things about your company, and floats a large valuation to catch you attention. Depending on the day and the circumstances in your life at the time, it can be a relief to think you’re this close (pinches finger and thumb together) to a deal that will set you and your family up forever.
What’s the best thing you can do to take advantage of this situation? Pause. Then talk to an expert. Here’s why.
Treacherous waters ahead
My business partner, David Tolson, and I have seen the “one-off deal” many times in our nearly two decades in investment banking. In fact, we named our firm Class VI Partners because it reflects the level of challenge involved in securing a great outcome in a business sale or recapitalization transaction.
In the world of whitewater kayaking, Class VI rapids are defined as extraordinarily difficult. They should be attempted only by Olympic-level paddlers. The most likely result for a first-timer who enters such treacherous waters is to end up on the rocks, or worse.
Metaphorically, the same can be said when selling a company.
From offer to deal
Let me clarify one thing, once a company reaches a certain size, obtaining a nice offer on it isn’t the hard part. Investors are out hunting for opportunities. Making your way from that initial offer to a final deal is where the problems arise.
Sometimes issues emerge because the buyer is inexperienced and these transactions are complicated. Most often, however, the buyer knows significantly more about the process than the business owner and leverages this upper hand strategically and relentlessly through the due diligence period.
Here in broad strokes is how the story usually goes:
- A call comes in from a strategic or institutional investor who wants to talk about the possibility of acquiring the company. The owner’s interest is piqued and they figure, “why not hear them out?”
- Early conversations are promising. The owner shares some financials, which position the business in the best light possible (definitely not “warts and all”).
- The prospective buyer says complimentary thing and an exciting valuation is presented.
- Before you know it, a Letter of Intent is signed by both sides. The entrepreneur is now locked in for an exclusivity period, usually 45 to 90 days. They can’t talk to any other potential bidders.
- Due diligence begins and the deal starts to disintegrate. The “warts” come to light and the buyer adjusts their offer downward. The seller feels like they were duped by a high offer and trust evaporates. And so it goes…
Despite thousands of conversations with entrepreneurs, I still find it almost impossible to convey the intensity and complexity of these negotiations. The emotional highs and lows, the overconfidence and self-doubt, the unremitting stress and sheer exhaustion a business owner will experience.
I’ve tried almost every metaphor and told numerous cautionary tales of Deals Gone Bad. Nonetheless, at the conclusion of the more than 100 transactions we’ve completed at Class VI, every single client has expressed the same sentiment: “You told me what to expect and still, I had no idea what I was in for.”
More than 99% of entrepreneurs face two potential outcomes
So how does the story turn out? One of two ways:
- After extended wrangling and multiple reductions in purchase price and terms—based on issues the prospective buyer discovers during due diligence—the business owner accepts far less than the initial offer and, frankly, far less than the company is worth.
- The business owner wastes substantial time and money pursuing a deal. Finally, dismayed by the falling valuation and increasingly unattractive terms, they walk away, taking with them a business made weaker by all the distractions they’ve endured.
We’ve heard numerous justifications over the years for why business owners jump on the one-off deal. Sometimes, they’re simply keeping an open mind. “I need to explore this opportunity. If it doesn’t pan out, I’ll walk away.” (Warning: That’s harder to do than anyone expects.) Other times, an entrepreneur will vouch for the investor. “They’re a supplier. We’ve done business with them for a decade. They won’t treat us like a private equity firm would.”
There are endless variations. The outcome rarely changes.
The driver chooses the destination
Why is the one-off deal so problematic? First and foremost, the buyer is in the driver’s seat. They have the experience, set up the process, dictate the timeframes, ask the questions, and because there is no competition, enjoy the upper hand in negotiations.
Other factors usually contribute to disaster:
- An entrepreneur approached with an unsolicited offer will generally be unprepared for the rigors of due diligence. They will struggle to assemble a quality M&A team, let alone respond to the onslaught of requests for information and documentation.
- A business owner will inevitably have blind spots about risks investors will pounce on. We’re talking about those “warts” here. Without mitigating or positioning around those risks in advance, they will have a negative impact on price and terms.
- In the initial conversations, the owner likely presented optimistic growth projections without a bulletproof plan demonstrating why those targets are credible. This becomes another “ding” against them when trying to reach a final deal.
There is more to say about each of these issues but let’s get to the crux of the matter…
With so much at stake, why not do it right?
There is an alternative to a one-off deal. It’s called an auction process. This isn’t like putting your baby on the block in front of a room full of people waving paddles. It’s a proven, confidential process designed to attract multiple bidders. And with the competition comes negotiating leverage.
The auction process is good for the seller—and that’s precisely why investors bringing unsolicited offers will try to dissuade an entrepreneur from initiating one. A prospective one-off buyer will say time is of the essence. They’ll hint about walking away. They’ll try to turn up the pressure, because they prefer the advantages of being the only bidder at the table.
But think about it for a moment. If an investor is truly willing to pay millions of dollars for your business, would allowing a few months for you to prepare properly be a dealbreaker? Why isn’t that a plus for them? And why wouldn’t your new suitor be willing to compete on a level playing field for an acquisition as worthy as this one?
Then think further. If the potential buyer is so fickle that a little extra time would change their mind about the unique value of your business, is this an entity to which you should entrust the future of your loyal team, not to mention your own legacy? And if they’re afraid of a competitive bidding process, do you really think they’re bringing their best offer today?
Now look at what you’ve built. You’ve done what it takes to create a business valuable enough to attract a compelling offer. This is something the vast majority of entrepreneurs never achieve. You deserve to reap the full reward for your innovation, commitment, and effort.
So pause. Consult an expert. Put yourself in the driver’s seat.
If this bidder is serious, they’ll respect your savvy and stick around for an auction process. If they’re truly the best fit, they’ll acquire your business in the end. The only thing that will change if you go about a company sale the right way is that you’ll wind up with a deal that’s maybe not quite as good for them but much, much better for you.
Chris Younger | Managing Director | Class VI Securities, LLC | Class VI Family Office, LLC
Chris co-founded Class VI in 2005 with a mission to Enable the Entrepreneurial Spirit. Sharing a passion for what entrepreneurs mean to our community, Chris and his business partner David Tolson felt they could do a better job for business owners and have had a great time helping clients ever since.
Prior to Class VI, Chris spent more than 20 years gaining experience in executive management, marketing, sales, law, and mergers and acquisitions.
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