Recently we’ve been contacted by more and more businesses owners and their advisors about receiving unsolicited offers to sell. Owners in this case often tell us that they had no intention to sell at this time, yet an attractive offer had them reconsidering their position on the matter.
In the cases where owners have pursued these offers, the results have been overwhelmingly poor. This is true for a number of reasons, but based on our extensive experience acting as sell-side advisors to privately owned companies in the middle-market, here are our 3 most common pitfalls to avoid:
Suitors who pursue off-market companies like this are notorious for distracting the business owner from their core operations. Sellers underestimate the enormous time demand that comes with the M&A process and buyers know this. In this context, buyers are not bound by any sort of time restraint such as one you would see in a formal controlled auction process, so they often string the buyer along (meetings, phone calls, data requests, etc…). Sometimes up to a year and even longer! Almost inevitably, this process takes its toll on the seller and their business, and value is negatively affected. Ultimately, the buyer either negotiates a lower selling price (to the sellers dismay) or the deal blows up altogether and the seller is left with a damaged company while the buyer walks, free of consequence.
Unlike public companies, privately held firms are not easily valued. The only true way to know the value of a privately held company is to take it to market. Thus, sellers who choose to negotiate with a buyer on an exclusive basis are truly operating in a vacuum. Sure, the offer in question may sound good, and may allow you to meet your financial goals post-closing, but how do you know that you’re maximizing the value of your life’s work? The answer is, you don’t. And buyers are keenly aware of this. Why do you think they approached the owner in the first place? Lack of a bidding war means lower price. Negotiating is all about leverage, and in an exclusive negotiation like this, buyers have all the leverage.
Buyers often approach sellers simply to learn more about their business because it costs them nothing. Smaller competitors can offer them insight into markets, processes, operational efficiencies, customer contracts, or any number of valuable components of the business they can get their hands on. Research has shown that the most common breach of confidential information comes from the seller themselves! Seller’s who are overly trusting need to ensure that they are protecting themselves from divulging confidential information that can strengthen their competition. Sellers should also have non-solicit language in these agreements to ensure key employees are not poached.
We’ve also seen a growing trend of buyers who are “locking up” companies with a Letter of Intent (LOI) then shopping the deal for financing and/or equity sponsors. In other words, they don’t have the money. In more extreme cases, they’re looking to flip the deal at a higher valuation prior to closing. Again, this is why buyers seek “off-market” firms. They seek to prey on unsuspecting sellers.
Selling a business is a hugely critical decision that should not be done haphazardly or without proper direction and advice from professionals who have transaction experience such as an M&A attorney and M&A Advisor.
Please do not hesitate to Contact Us if you have any questions.
We look forward to speaking with you.