The ‘solus’ approach: Handling unsolicited offers
Successful businesses often receive offers out of the blue. Occasionally, they land at the right time – what happens next?
At Rockworth, our clients are typically the owners and managers of successful, profitable businesses. For these individuals, it is very common to receive expressions of interest from parties wishing to buy or invest in the company. These approaches may come from larger players in the same industry, private equity deal origination teams, or even individual buyers.
Of course, handling such approaches is relatively easy if your business is categorically not for sale. Most such letters end up being filed in the bin.
But what if you were planning to sell your business in the near future, and you are open to a conversation with a potential buyer? What is the best way to progress from an unsolicited approach to a completed deal?
Appointing an adviser
If you want to engage with a buyer who has made an approach, your first step should be to appoint a good corporate finance adviser who can support you.
Selling a business is complex. Even moving from the unsolicited approach letter to a real and substantive offer is complicated and fraught with risks. An experienced adviser can help you plot a route through the maze.
The sale will also demand a huge amount of time from you and your management team. Working with an adviser will improve your chances of maintaining the operating performance of the business through to completion and ensure the value you receive for your company is optimised.
Working with an adviser also significantly strengthens your hand when negotiating with the other side. The buyer knows you will have a clear idea of whether their offer is pitched at the right value, and that you will be properly advised on the numerous technical aspects of the deal structure. It is much harder for a buyer to squeeze you on value or reduce the offer price at the last minute, if your position is being protected by a professional and experienced advisory firm.
Firming up the offer – how serious is the buyer, and what do they think your business is worth?
The buyer’s first approach will have been made based on publicly available information, including your Companies House filings. As such, the buyer won’t have a current view of your trading performance. Depending on timings, the buyer could be looking at financial information that is nearly two years out of date.
And even if your statutory accounts include a full Profit & Loss statement, there could be various transactions and arrangements within the business that distort the publicly visible profits.
This can lead to a serious misalignment, when it comes to what you and the buyer think your business is worth.
Correcting this will require you to start sharing some more recent information about your business. Your adviser will put a Non Disclosure Agreement in place, and then open up more detailed discussions with the buyer. A balance needs to be found between providing information that is reasonably required for the buyer to put their offer together, and protecting your commercially sensitive data.
Early indication of value – go or no-go?
After some careful sharing of information, the buyer should be able to give you an indication of what they might pay for your business.
To persuade you to proceed, the buyer clearly needs to name a price which is fair and does not leave you wondering if you might get a better offer elsewhere. If the proposed value is simply too low, your adviser may be able to improve the position through negotiation. But, if not, then it makes sense to have a frank conversation with your adviser to explore your options. These might include:
- Widening the process. Having started to seriously consider selling your business, you could ask your adviser to begin researching and approaching other potential buyers. Your adviser can give you an honest opinion about whether this is likely to yield a more attractive valuation and offer.
- Pausing the process. If your business is growing successfully, you could opt to postpone the sale until profit has increased. Your adviser should be able to help you put a plan and a timetable in place, preparing the business for a future exit at an optimised value that meets your ambitions. Of course, there are also risks and uncertainties associated with delaying your exit. It takes a high degree of confidence in future performance to turn away serious offers for your business.
Alternatively, if the buyer indicates an acceptable value, then you and your adviser can proceed with negotiations. The discussion will move on to other aspects of the potential transaction, including earnouts and the treatment of balance sheet items, including property, cash and working capital.
Assuming no brick walls are hit during the negotiations, the buyer should produce a Heads of Terms document – a detailed but non-binding offer to acquire your business (also sometimes known as a Letter of Intent, Memorandum of Understanding, or Non-Binding Indicative Offer). It makes sense for you to have appointed a specialist lawyer to handle the transaction by this point – legal review of Heads of Terms, alongside your corporate finance advisor’s commercial input, can be invaluable.
Decision point
If you’ve made it to this stage, it is time to make a decision.
Signing the Heads of Terms will give the buyer a period of exclusivity, preventing you from speaking to any other potential acquirers whilst the buyer carries out detailed due diligence. This is an intense phase of the transaction process and can last 3 to 6 months.
Before you sign, there’s still one last opportunity to discuss the detail of the offer with your adviser. Hopefully you will be ready to proceed. But you could also revisit the options mentioned above – pausing or broadening the sale process.
At Rockworth, we have seen unsolicited approaches go all the way to a sale that all parties are delighted with. We have also had clients ask us to use the unsolicited approach as a jumping off point for a wider search for an acquirer. Both approaches have their merits, and both need to be carefully managed to get to the right result.
If you’ve received an unsolicited offer and are wondering what to do with it, we would love to talk with you.
