Best Practices for Responding to Inbound M&A Solicitations

02 November, 2018

buy_sellEvery day, business owners are approached by third parties interested in buying their business. These buyers could be individuals, direct competitors, or private equity groups. Even if you’ve never considered selling your business, with today’s valuations being higher than at any time in the past, the offer might be enticing. But how do you know if entertaining an offer is the right decision for your business?

We recently had the opportunity to sit down with Terry Fick, Managing Director at Corporate Finance Associates, to discuss best practices for responding to inbound M&A solicitations. Terry also presented a webinar on the subject which can be viewed here:

View Recording ➞

Terry Fick | CFA

Q: As a business owner, what types of buyers can I expect to approach me?

A: The buyers that are most likely to approach you could either be, private equity groups or corporate buyers who have some synergy with your business. Individual buyers are also a possibility. What you may not see, is what we call family offices. These are individuals who have sold companies before, have made money, and are out buying other companies—they simply don’t use the direct approach. Business owners are more likely to be approached by private equity groups than by corporate buyers, but both of them are out there directly contacting business owners.

Q: I’ve never considered selling my business, but now I have an offer. How do I determine if entertaining an offer is the right decision for my company?

A: Before ever being approached by a potential buyer, business owners should define their own exit strategy, so they know what they want. The first question business owners should ask themselves is if they’re interested in selling their business if a reasonable offer materializes. So there’s more to consider than just money. Some business owners never consider selling their business. Others might be open to a sale but aren’t ready because they haven’t found what they would do after the sale. Every business owner should consider what their personal exit strategy might look like and what their role post-closing will be. And remember, there’s no rule that says you have to respond to these approaches.

Q: Does the seller’s desired post-closing role determine what kind of buyers they talk to?

A: Absolutely. That’s why it’s important for owners to determine their desired role in advance and not let the buyer define that. Private equity groups often expect the seller to stay on for a number of years and remain involved in the business. Corporate buyers tend to do the exact opposite. They will have middle managers that they can put in place to run the business as they see fit. That’s why it’s important to determine what you’d like your role to be post-closing very early on because it will likely determine which types of buyers it makes the most sense to talk to.

It’s also important to consider your business profile. There are certain types, sizes, and segments of businesses that might be a better fit for private equity buyers than corporate buyers or vice versa.

Q: What kinds of questions are buyers likely to ask?

A: The first thing a buyer will want to see is the company’s financials. They will want to know about revenue and earnings. They will want to know how much of the company’s gross profit comes from the company’s biggest customer. They will want to know how much of the gross profit comes from the company’s most important product. Then they will try to find out as much as possible about the company’s employees and customer base.

cloud_computingThe most important part of this process is being prepared. Be proactive, not reactive. Have everything a buyer would want to see organized in a virtual data room. That shows that you are professional and it creates the perception that you are talking to multiple parties. Whether that’s the case or not, you want buyers to think they have competition.

Using a virtual data room also saves a tremendous amount of time. If you’re talking to multiple buyers, all your due diligence information only has to be put together once. Then each buyer is given the appropriate level of access, and more sensitive information, such as customer names or personnel can be staged and shared when the seriousness of the buyer warrants it or after you’ve signed a letter of intent.

Q: What are some of the things a seller should never do when responding to offers?

A: First and foremost a seller should never tell a buyer what they want for their business. At any time in the process, that question should be avoided like the plague. The buyer will ask that question in many different ways, but sellers should avoid getting trapped into making an offer to the buyer. Make the buyer put forth the proposal. Then the seller can counter or imply that other offers are more attractive.

Similarly, never divulge to a potential buyer who the other potential buyers may or may not be or what they may have offered. It’s perfectly ethical to let buyers know that you’re talking to other potential buyers, but that’s all they need to know.

Q: How do I know what my company is worth and how do I maximize valuation?

A: One way to determine valuation is to talk to someone who is out in the marketplace selling companies. That could be an investment banker or perhaps your CPA firm. Remember, you’re not trying to determine what your company is worth in a divorce or partner buy-out or IRS settlement, you’re trying to find out what the company is worth in today’s market. The people who know that are the people who are out in the marketplace right now completing transactions.

This should be completed long before you even start talking to potential buyers so you can evaluate whether your business is worth to others what it’s worth to you. For instance, if you don’t want to sell your business for less than 30 million dollars but you find out that it’s currently worth 20 million then now is not the right time to start talking to buyers. Don’t set yourself up for disappointment and go through a lot of work if you’re not willing to sell for something close to what the market will sustain.

Event QuoteOnce you’ve come to terms, you can start maximizing valuation by preparing for the due diligence process. Ensure you populate a data room with everything a buyer would want to see. During that process, look at your business through the eyes of a buyer. If you were considering buying your business, what kind of questions would you ask and what risks would you see? If any red flags appear, rectify them before going to market.

Even if you’re not thinking about selling your business for five years, you should consider thinking about these events because it’s just good practice. Most business owners don’t, but ideally you should be thinking about selling your business the day you start it. Selling a company is not an event; it’s a strategic process. That process can start a month before you go to market or it can start on the day the company is founded.

Q: How important is it to have an investment banker involved?

A: One of the values an investment banker brings is sending a tremendously credible signal that you are talking to other people. Why else would you hire an investment banker? An investment banker will also be able to look at your business through the eyes of a buyer more objectively than you can and determine what kinds of things need to be done to answer buyers’ questions before they’re asked.

An investment banker can be instrumental in helping to pull information together and organize the data room so that everything that a buyer will want to see is there. This can save you and your CFO a tremendous amount of time. He can then begin discussions with the players that have contacted you, but he can also be instrumental in bringing more players to the table.

The other benefit an investment banker brings is being a buffer during negotiations. Sometimes negotiations can get a bit cantankerous, and if this is somebody that you might continue to work with for several years, then you want to preserve that relationship. A good investment banker has likely navigated this process many dozens of times and knows how to handle buyers and keep negotiations on track.


Terry Fick is a seasoned M&A professional with 30 years experience and close to 100 closed transactions to his credit. Terry is a founder and board member of Corporate Finance Associates Worldwide, the parent of CFA. CFA is a middle market Investment Banking firm with offices across the United States. He led the buyout of CFA from its owner in 1996 and was the Chairman in 2002. Terry has been honored as National Dealmaker of the Year numerous times and has been honored as only the second Chairman Emeritus title in the 60-year history of the firm.