How Do You Respond to an Unsolicited Offer?

Unsolicited offers tend to come at inopportune times.  While some are actually opportunistic, most come out of the blue when the potential seller is not ready to receive them.  Unsolicited offers for private companies tend to come from immediate competitors, customers or suppliers and, these days, private equity is also actively searching for new platform investments.

If unsolicited offers are common in your sector, here are some considerations to keep in mind.

Be prepared – if you are in a position to bring other credible buyers into the process quickly you will gain substantial negotiating power.  To accomplish this you should already be on other potential acquirers’ radar screens.  Make them aware of your capabilities, your value proposition and explore OEM / distribution relationships.  When multiple buyers are brought into the process, the negotiating power shifts significantly toward the seller, who can use a competitive process to maximize valuation.

Keep your options open as long as possible – a Letter of Intent (“LOI”) will almost always include an exclusivity clause.  This is because a signed LOI is an agreement in principle and expensive external resources (accountants and lawyers) will now be engaged for due diligence and closing the transaction.  Exclusivity means the seller cannot engage in terms discussions with any other party for the agreed upon period.  This shifts the negotiating power to the buyer.  If the buyer finds material valuation issues during due diligence and seeks a price adjustment, the seller has no recourse other than to compromise on terms or walk away from the deal.

Focusing on a single buyer does not necessarily save time – sellers sometimes shy away from a formal process based on the amount of time and effort it will take.  However focusing on a single buyer does not always result in reduced effort. A buyer in an open-ended, uncompetitive situation will often continue to ask for more and more detailed information exhausting the seller in the process.

Perform buyer due diligence – what is the buyer’s long term strategy?  Is the buyer well capitalized or overleveraged? If the buyer is a private equity group, what is their typical ‘hold time’ until a company is resold?  If the offer includes a note or an earn-out, the seller assumes buyer and/or performance risk.

Bring an independent advisor into the process – unprepared companies tend to assemble requested materials in a rushed manner and answer questions ad hoc without a well formulated strategy.  By bringing an independent M&A advisor into the process you immediately formalize the process and create additional options.  Introducing actual or threatened additional buyers into the process will likely result in the initial buyer raising its offer.

When you accept an unsolicited offer, most of the time you will leave money on the table compared to an offer arrived at through an auction process (even a limited one).  By acquainting yourself with the potential buyer universe and working with an independent advisor, you can quickly bring other interested parties into the process and improve your outcome substantially.

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