Almost invariably, private company owners say that they have had a call from someone who has expressed interest in buying the company. While the inquiry may flatter, probably every owner or majority shareholder of a mid-sized business in a moderately attractive industry gets these calls regularly. Industry trade shows are a rich source of these conversations, too.
What to Do When You Receive These Inquiries: Be Receptive, But Very Wary
First, pretend that someone has read you your Miranda Rights: “Anything you say may be used against you…” Be aware that whatever you reveal in this conversation may inform an industry rumor mill – or worse.
- Ask who the caller is representing, if not apparent, and the nature of their role. The key point is to gain an understanding of who is approaching you and why.
- Get the caller’s name, phone number, email address, company name and web site, and say that someone will get back to them. If they decline to provide the information and say that they will call you back instead, say “please don’t trouble yourself.” You won’t regret that.
- Get professional representation, and provide the contact information to the advisor to return the call. If properly qualified, he or she will know what to say – and what not to say – to best protect your economic interests.
The advice in this fourth point does not always apply to start ups that are viable candidates for venture capital investment (perhaps 1-3 of 1,000 would be). Since the discussion becomes more nuanced, it’s out of this article’s scope.
Saying the wrong thing to the wrong person can result in uncontrolled industry rumors that your company is in play, which can quickly upset employees, customers and suppliers. It could even be used by someone trying to profit from the knowledge, hoping for a fee by passing it along.
Part of an investment banker’s role is to be a trusted advisor upon whom you can rely to handle inquiries like this and respond according to your objectives. Even if your company has no interest in a transaction, filtering the discussions through an advisor will enable you to keep apprised of the market for the future, but not in a way that feeds the rumor mill.
It is no coincidence that even the largest, most successful Fortune 100 companies hire investment banks to represent them in a sale or merger process. If these companies recognize their inability to represent themselves most effectively, there is no reason to think that mid-sized companies with less management resources can do so.
Who Are the Callers?
Direct Competitors – It is not unusual for competitors seeking confidential information to use acquisition intent as a ruse. Sometimes, they will use third parties to make the call. Reputable professionals will not participate in such a ruse.
In some cases, competitors truly hope to buy, and the process of engaging with them in the M&A process is particularly delicate, to protect confidential information. While it may seem intuitive to sell to a competitor, they should be considered buyers of last resort, and only then when approached differently from other buyers.
Other Companies – Other companies either within your industry or otherwise may express interest. In our business, these entities are referred to as “strategic acquirers,” or just “strategics,” as their intention is to buy for reasons that support the strategic goals of the company. As example, companies routinely face the “buy or build” decision when entering new markets or developing new products. A strategic acquirer has decided to buy instead of, or in addition to, building. Contact with these companies is often made at industry trade shows.
Investors – The caller may be from a private equity investment fund seeking companies in which to invest. Over the past 15 years, as an increasing number of private equity groups seek attractive companies to buy or in which to invest, they have increased their deal flow by hiring recent college and/or business school graduates to “work the phones.”
Intermediaries – It may be someone such as an investment banker, merger & acquisition intermediary, business broker or attorney who is representing another entity that genuinely seeks acquisitions. It is entirely feasible that a 3rd party may not yet be able to reveal the name of the principal they are representing, but they are merely inquiring to determine whether your company would be open to considering such discussions. This approach is legitimate, and there is good reason why some acquirers may not want information in the public domain that they are seeking acquisitions. For instance, that information could tip off their competitors to new product development intentions. In these circumstances, identities become known when the parties sign a confidentiality agreement.
Consultants – The term “consultant” is so broad it’s meaningless. It is especially advisable to defer these calls to a trusted professional advisor. If the consultant’s email ends in an address like Yahoo, Gmail or Hotmail, be especially cautious. Many may even be violating securities laws by acting as “finders” without being registered with the Securities & Exchange Commission. 1
In all cases, you’re better off handing the inquiry off to a trusted advisor to respond to them.
If you are interested in offers, chances are that the management team of your company is not adequately qualified to represent itself in a sale, and if you do so, there are many likely unfavorable consequences.
Negotiated Sale Versus Auction
A company owner who negotiates with only one potential acquirer or investor is engaged in a single party negotiated sale. While this is an appropriate tactic sometimes, the decision to do so should be made consciously, not by default.
Typically, buyers hope for this arrangement, as it reduces competitive pressure on the price and deal terms. Also, it puts more negotiation power in their hands.
When a seller proceeds ahead without indicating that he’s talking with other buyers, it may suggest to a sophisticated buyer that he probably knows more about the M&A process than the seller, and thus can more easily maneuver and delay it to his advantage. For instance, an intentional delay can be used as a “wear down” tactic.
Additionally, a solitary buyer can prolong the due diligence process endlessly.
In contrast, a professionally-managed merger & acquisition process will usually seek to establish a simultaneous competition among multiple buyers. In the case of private companies, the competition is typically run confidentially among a limited set of acquirers who have responded favorably to the investment banker’s inquiry.
The ultimate sale price difference between the single party negotiated sale and a competitive M&A process likely would be dramatically different.
Best Exit Channel
Incidentally, there are seven equity transfer channels through which owners may sell their equity; selling, then transitioning out of the business, is merely one of them. If you are contemplating an exit, you owe it to yourself to consider the array of options, not just one. Part of our role as investment bankers is to help educate owners on the options, guide them toward the most suitable one(s), and then manage the team of expert advisors to execute the transaction.
Active Or Passive?
Companies whose value is optimized for the seller are sold, not bought. Either the company is available or it is not. Passively waiting for buyers to approach is a formula for selling at a lower price and less favorable deal terms. If you are open to receiving offers, hire a professional advisor and do it properly from the start – you’ll come out far wealthier in the long run.
If you are reactive to an unexpected inquiry, you probably will not be prepared to respond in a way that shows your company at its best. For example, your financial statements probably will not have been adjusted to show the true economic earning power of the company – showing them to the prospective acquirer will likely set the negotiation starting point well below where it could be.
Professional advisors seek acquirers who will most likely realize the greatest value for the business, then actively attempt to engage them in a professionally-managed, M&A process. It is a proactive, not reactive, process that is proven to yield the best result.
Even if the owners’ objective is just to get out of the business as quickly as possible – such as may be the case when key management faces an urgent health crisis – then it still makes more sense to consider other buyers’ offers, because the passive approach so often results in a failed process without a closed deal – only wasted time to show for it.
There’s a reason for the often repeated saying in our business “one buyer is no buyer.”
Disclaimer: This article provides general information, and is not intended to constitute, and should not be construed as, legal, tax, accounting or business advice, nor does it constitute an offer to sell or to purchase securities. Rather, it is summary compilation of timely issues confronting your industry and as such does not purport to be a full recitation of the matters presented. Prior to acting upon any information set forth in this article or related to this article, you should consult independent counsel and/or more detail contained in the Source Information. The article reflects the opinion of the writer, and does not necessarily reflect the opinions of Mid-Market Securities, LLC, or its affiliates. IRS Circular 230 Disclosure: In order to comply with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax discussion contained in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.