3 Tips on Avoiding Deal Fatigue in an Unsolicited Approach Scenario
The best ways to qualify a surprise offer on your business and how to protect yourself during the sale.
Imagine this scenario: you are running a very successful, independent business, posting record sales and profits year on year. The management team is committed and incentivized, and you and your fellow shareholders are reaping the rewards from the years of hard work and investment you have all put in. You have no intention of selling at any point in the near future, but out of the blue you receive an unsolicited approach from the market's leading corporate, expressing their desire to meet with you to discuss the terms of a potential acquisition. Your initial reaction is to rebuff and dismiss the approach out of hand, but as curiosity seeps in, your stance softens. After a few weeks, you find yourself sitting at your desk reading an email which contains their indicative offer to acquire your business at a consideration that makes you and the rest of your shareholders ‘willing sellers’. Suddenly the realization hits home that you are actually going to sell…
How to Handle an Unsolicited Approach
So, what should you do? Receiving an unsolicited approach from a credible purchaser is the highest compliment—it reinforces that you have successfully built a business with a capital value to a third party who are willing to pay a considerable amount for it. Obviously at this point it is worth noting that not all direct approaches are from genuine parties—some competitors will adopt the pretense of seeking to acquire with no actual desire to follow through. Instead they look to undermine your business via data mining the intellectual property (such as client lists, pricing, supplier terms, etc.), along with unsettling key staff and leaking news to the market. Most purchasers, however, are entirely genuine and, assuming this is the case (which can be confirmed via clarification on their funding ability and track record of completing on acquisitions), then understanding how to run this process is pivotal in order to crystallize their indicative offer into actual cash in your bank account.
What Information Do You Give?
Once deal terms are agreed to and exclusivity is granted, the onus shifts to you to provide the information required for the purchaser to review and assess in order for them to fully understand the business that they will then own and identify any risks which they were not initially aware of which can then be apportioned in the legal contracts. This process is known as due diligence, and is the first stage where deal fatigue can begin to set in. In a managed process, you and your advisors will begin to prepare a data room from the outset, which will be annexed and list all of the necessary documentation that a purchaser and their investors will require to review in order to be able to conclude on a transaction, thereby ensuring that once a deal is agreed that diligence can commence immediately and momentum is maintained.
Depending on the nature of the business, the amount of information which will need to be provided for due diligence can vary, but even for the simplest of businesses it will still remain a time and resourcing task for the management team to complete. The first tip is therefore to undertake this exercise before the event occurs.If you are planning an exit in the short to medium term then this obviously makes sense, but even for parties who are not contemplating a sale, this process can still be a worthwhile investment. The process of diligence can prove to be a good ‘housekeeping’ task, identifying any contracts that may have lapsed and ensure commercial exposure is minimized, whilst also allowing you to stand back and analyze your company from an acquirers perspective—this can allow you to identify weaknesses or risks before implementing a plan of action to minimize them, or consolidate your views on the opportunities which will then feed through to your business plan and growth strategy. Going through an internal diligence process and being diligence ready is a worthwhile task, whether looking to sell now or in the future; preempting a direct approach; potentially raise external finance; or ultimately as good corporate governance if you simply trade on.
In an unsolicited approach, managing expectations and the time frame for due diligence is crucial and should be agreed as part of the heads of terms/letter of intent. The sellers need to be in control at this key stage, as letting the buyer dictate the length of this period or have it ‘open ended’ can lead to it becoming a prolonged and exhaustive process which buyers will then use this to their advantage and renegotiate terms at the 11th hour when the sellers are in a weaker negotiating position after months of preparing and compiling data. Agreeing to a short period of exclusivity (no more than 6–8 weeks) and ensuring diligence requests are completed efficiently is the second tip on how to avoid deal fatigue.
Keep Your Money on Your Mind
The final tip is not to spend the money until the deal is done. I have encountered a number of examples where the sellers have started to mentally withdraw from their business before the deal has actually completed, either beginning to focus on their next venture or preparing themselves for their retirement. This mind-set can have two significant disadvantages—firstly, should focus be diverted from delivering the expected financial results, then a buyer, quite rightly, will ask questions relating to the value that they are paying. If your company is being based on a multiple of profits or revenue and during diligence it is proven that the company is trading below the target amount that the indicative offer was initially based upon, then a buyer and their investors will question this and, if no credible answers can be provided, then the consideration being offered by them will be reduced.
The second disadvantage is when it becomes obvious to the buyer that you have mentally sold and exited—again this puts them in a stronger negotiating position and presents the opportunity for them to take a tougher stance during legal negotiations as well as potentially allowing them to seek to renegotiate the fundamental terms of the deal. My advice is for sellers is always to continue running the business during a sale process exactly the same as they would do if they weren’t selling—this ensures that you retain the right mind-set throughout and, should the buyer look to renegotiate, puts you in a position where you can walk away if the terms aren't entirely agreeable. This stage is where an advisor can add tangible value, managing the process and allowing you to concentrate on running the business.
The main disadvantage to agreeing to the terms of an unsolicited approach is obvious—however, if you can sleep at night without worrying whether there was another party who may have paid a higher price, then avoiding deal fatigue is the biggest obstacle to overcome in order to ensure that a successful sale directly follows an unsolicited approach.
Written by Adam Croft
Adam has been a lead advisor in the UK for M&A for over 10 years. His insights and advice come from a successful history of the due diligence involved in solid valuations to complete successful mergers and acquisitions.