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Reacting to unsolicited offers

What should you do if you receive an unexpected offer to buy your company during the Covid-19 crisis?

Reacting to unsolicited offers

Despite the Covid-19 crisis there are still acquirers out there with cash on their balance sheets, and with bank interest rates low they are looking for companies to buy that will bring them a better return. While the pandemic offers them the opportunity to drive a hard bargain and pick up small firms for a relatively low price, they don’t hold all the cards when it comes to a negotiation and you can still get the deal you want if you know how to go about it.

If you get an unsolicited offer it can be flattering, says Andrew Shepperd, a Director of Entrepreneurs Hub, which advised on two recently completed sales. But with the initial approach the buyer may already have seized control of any negotiation because they will be the only ones in the running, and if you want to take the opportunity to sell you may need to redress the balance by seeking out more potential purchasers.

But before you make any decisions be patient, listen to what they have to say and sleep on it. Then, if you decide to take it further find advisers who can guide you through the process and may even be able to identify other potential buyers. Andrew explains: “We’ve found that often those unsolicited approaches seem decent but on review, and with the context of a proper market process where you get other interested parties, the consideration can double, or even quadruple.

“There are some very, very good serial acquirers out there that are proactive and what they want to do is deal with the seller directly without advisers because they’d rather not be in a competitive situation where it may be harder for them to achieve the best terms or the lowest price. What you find is the value that people will often pay in a competitive situation will be higher. So, the initial offer may be £2 million but when you bring another potential acquirer in it may go up to £4 million.”

Know your acquirer

Another Entrepreneurs Hub Director, Malcolm Murray, explains that there are also organisations now offering courses on how to buy a business without spending any money and says that offers of this sort, which are often funded from seller assets and seller future receivables, can be low value for the seller and in effect the seller is funding their own purchase. He says that you should find out who your potential buyer is before proceeding and if you are comfortable, get a non-disclosure agreement in place. You should create and supply them with a sales document that provides them with a future value of the business, so that they can make an initial offer. You only need to enter into a formal due diligence process if that offer meets your expectations. It is much better to get an advisor alongside you in the process.

Nigel Fox, former Chief Financial Officer of Avanti Communications, now advises SMEs with business growth advisors Elephants Child. He agrees that entrepreneurs should avoid a knee-jerk reaction to an offer. He says: “My advice to anyone receiving an unsolicited offer would be to acknowledge it, say that the business isn’t currently for sale but you are open to a strategic discussion and suggest a follow-up conversation. That puts you in a position to take a deep breath, consider it.

“The vast majority of businesses, with some notable exceptions, will be to some extent distressed. They will have had to furlough people, work remotely and work in a different way. Some will have had capital structure issues in terms of cash flow and therefore a smart acquirer with deep pockets will say ‘now’s the opportunity to see what we can pick up on the cheap’. Cheap may only be 10% or 15% cheaper than they would otherwise have been able to buy the company for but that’s a significant amount if you are a business owner.”

Due diligence

He agrees that you should do your own research to understand who the acquirer is and whether they really are likely to complete a worthwhile deal. Once you’ve done that you should set up a data room, either physical or virtual, where the buyer can access the information they need for their due diligence. However, he says that some approaches are made by competitors with no real intention to buy, who just want to gain information about your company, so acquirers should be given information in stages with sensitive details only made available late in the process.

Nigel adds: “If you agree a sale, you’ll need your accountants or tax advisers to make sure that your exit is structured tax efficiently. This is the sort of thing that business owners tend to forget about. They might agree a £10 million sale but they don’t realise that without proper tax planning it might only be £4 million in their pocket because they haven’t done it properly.”

This is a worst-case scenario and it is unlikely to be so extreme. However, good advice when you are valuing and selling your biggest asset is essential and should more than pay for itself, says Andrew. 

If you need support through a sale, talk to your St. James’s Place Partner.

The opinions expressed by third parties are their own and not necessarily shared by St. James’s Place Wealth Management.

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