It’s a scenario mergers and acquisitions (M&A) advisors see often: A buyer approaches you with an interest in acquiring your business, asks for financial and operational information, and wants to move quickly. Whether it sounds like a once-in-a-lifetime opportunity or simply piques your curiosity, an unsolicited inquiry can be exciting. In that excitement, owners often engage in conversations before they have a strategy in place. Without understanding what to provide, when to provide it and how to properly frame the information, owners can unintentionally shape a buyer’s perception of value before negotiations even begin, reducing their leverage later in the process. Our M&A specialists and transaction advisors offer five steps to vetting an unsolicited offer with an eye on optimizing your negotiating position and maximizing your value.

Step 1: Verify the Buyer

When a buyer approaches a business unsolicited, it can be tempting for a seller to focus on the potential payday, but the first question is actually whether a buyer is even legitimate. Not every inquiry comes from a serious, qualified buyer. Some may simply be broad marketing efforts targeting business owners, while others may come from buyers who lack the capital to complete a transaction. Considerations to explore include:

• Buyer type (strategic, financial, etc.).
• History of completed transactions.
• Why your business is being targeted.
• Whether they have the financial resources to complete a transaction.
• References from business owners who have previously sold to the buyer.

Understanding the buyer’s background can reveal a great deal about their intentions and capabilities. For example, a strategic buyer is often easier to evaluate because their financial resources and acquisition history may be publicly available. In contrast, some buyers may present themselves as private equity firms but haven’t yet secured funding for acquisitions.

It’s also worthwhile to screen for a history of fraud and unfair dealings. A buyer may be known for trying to snap up businesses at under-market values or through hostile bids, failing to honor preliminary agreements or creating difficult negotiations.

Step 2: Put Confidentiality Protections in Place

Entering into discussion with either a financial or strategic buyer must be done on a confidential basis. However, once your confidentiality agreement is inked, actually determining what information to share — and more importantly, when to share potentially sensitive information — is one of the most important facets of the deal. Providing too much information too early can weaken your negotiating position or expose confidential information unnecessarily.

Before sharing sensitive business information, the buyer should sign a confidentiality agreement (also known as a non-disclosure agreement, or NDA). A confidentiality agreement helps protect your financial information, customer relationships, employee data and proprietary business processes if discussions don’t lead to a transaction.

Step 3: Understand the Buyer

Uncovering buyer motivation can be both illuminating and valuable. For example, the buyer may be looking to:

• Consolidate an industry sector.
• Enter a new market.
• Add new customers or capabilities.
• Acquire key talent or expertise.
• Eliminate a costly competitor.
• Capitalize on operational synergies.

The more you understand what’s driving their interest, the better positioned you are to frame information about your business in a way that sets you up for a better offer.

As you explore an unsolicited approach, remember that the first buyer to express interest isn’t always the best buyer. An unsolicited bid may create an opportunity to test market interest and determine whether other buyers could place a higher value on the business or offer more favorable terms.

Step 4: Explore Company Value

Determining whether a bid is fair requires understanding your value in the current market — but rushing into a valuation can prematurely place a cap on your potential sale price. Instead, focus on analyzing the value drivers within your business and the strategic benefits your company may offer a particular buyer. In some cases, the value of your business to a specific buyer may be significantly different than its value to the broader market. Maintaining flexibility and avoiding premature pricing discussions can preserve negotiating leverage and create opportunities for a stronger outcome.

Importantly, bring in your tax advisors to gain an understanding of how your value translates into after-tax proceeds, as the highest purchase price may not always produce the best financial outcome.

Step 5: Evaluate Preliminary Offers

As discussions progress, buyers may present either an Indication of Interest (IOI) or a Letter of Intent (LOI). Understanding the difference is important. An IOI typically provides a preliminary indication of value and transaction structure, while an LOI is a much more significant document that begins establishing the framework for the transaction.

Sellers will want to carefully review an LOI to ensure it includes the material deal terms, not merely a summary of the transaction. While many LOI provisions are non-binding, exclusivity provisions are typically binding and can significantly reduce your negotiating leverage, so be sure to involve your transaction advisors before signing anything.

M&A Pros to Guide Your Way

An unsolicited acquisition offer may represent a significant opportunity, but it should be approached thoughtfully and strategically. Look to the M&A specialists and transaction advisors at Doeren Mayhew to help you avoid common pitfalls and negotiate from a position of strength.