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How to Deal With Unsolicited Offers to Buy Businesses

Apr 5th 2016
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How do you advise a client who has had an offer for his business and is all excited about cashing in? Is this the start of losing a good client ... or is it an opportunity for you?

It's important to first assess the circumstances surrounding this offer. It's true there's a lot of money about, interest rates are low, opportunities to get a decent return on capital are limited and public companies are always on the lookout for investments that can increase shareholder value. However, many approaches like these are not what they seem at all.

The risks

Buyers, including private equity firms, often don't disclose that they are unfunded. Many are looking to make acquisitions with little to no initial capital outlay.  They'll typically ask for a closed shop ie. an undertaking that the vendor deal with no other prospective buyer for a pre-defined period of time.

During these months they will drag out due diligence, find excuses to chip away at price, demand a larger and larger component of seller financing and play a persistent and polite game of frustrating the vendor into making deep concessions. They are past masters at what they euphemistically call "managing seller expectations". Their goal is to get control of the business without risking much (or any) capital.

Other parties posing as investors have a different agenda. Their modus operandi is to get the owner excited enough by the large number to sign a non-binding Letter of Intent that gives them full access to the books.

They'll trawl through the records and go through the motions of due diligence, but their goal is to collect commercially valuable information. They have no buying intent. When they've got what they want, they'll make an offer they know won't be accepted and they'll graciously bow out.

The third kind of approach is not from an investor but from a business broker or other intermediary claiming they have a vast database of buyers who're looking to make an acquisition. These databases are often just mailing lists they're purchased online, but the story of hordes of desperate buyers does work to land these brokers new clients.

Genuine Offers

If it is indeed a genuine offer or a genuine expression of interest from an investor, it's a great opportunity for your client to retire or move on to his next venture. However, even genuine buyers are hard nuts and use sharp corporate finance professionals, legal teams and other advisers to protect their interests.

Your client would be wise to not try to DIY his way through meetings with these investors, opening his books to them or negotiating with their teams. He'll need the professional assistance of a trustworthy and competent business broker, M&A adviser or investment bank (depending on the size of the business).

How you can help

This is where the opportunity exists for you. Finding the right type of professional assistance isn't easy. It takes much research and speaking with several prospective intermediaries to assess their competence to handle your client's sale and how well suited they are to handling businesses in the sector, of this size, in this geographical territory.

While brokers pay a large commission to accountants who introduce a client - a $15,000 - $20,000 introducer commission on a business with enterprise value of $1m is not uncommon - this commission is not added on to your client's invoice but comes out of what the broker makes on successfully selling the business.

From my own experience, matching business owners with the right intermediaries, and though I accept no 'introducer fee' from intermediaries, such matching significantly improves a business' chances of being sold and it is very satisfying to see the end result. 80% of businesses going to market never complete on a deal. You can help your client figure in the 20% that do.

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