Unsolicited offers to acquire middle-market companies are rising. Such offers can undervalue a business, but also lead to wasted time and effort. Owners should seek expert advice and follow best practices before responding to any unsolicited offer.
According to an EY analysis, the total value of deals in North America exceeded $1.4 trillion in the first half of 2021—quadruple the $345 billion done in the same period in 2020. The U.S. middle market is strong as well. PitchBook’s third-quarter US PE Middle Market Report calculates that private equity firms closed nearly 2,900 middle-market deals worth $438.6 billion as of September 30, exceeding the full year record of $416.3 billion set in 2019.
For a business owner, evaluating a transaction can be overwhelming. "Preparation is the key to success," says Rob Schipper, Group Head of Investment Banking at Fifth Third Bank. "Middle-market companies should have a solid team of advisors—including bankers, lawyers, accountants, and wealth managers—in place before considering a sale offer."
Schipper says the M&A process can be complex, especially when there is a lot at stake. "Evaluating types of buyers (private equity versus strategic), tax planning, business strategy, financial diligence, deal structure, and employee incentives are just a few of the key items to consider," he says. "Preparing and understanding the owner’s objectives before getting the offer are critical."
Why Are There So Many Unsolicited Offers?
According to a recent Market Pulse survey by the International Business Brokers Association and M&A Source, unsolicited offers were the dominant reason why middle-market businesses sold during the second quarter of 2021.
Demand for acquisitions—and, therefore, the level of unsolicited offers—should remain high going forward. Schipper sees several factors that should motivate buyers well into 2022.
"Many acquirors are looking to grow their companies to add, scale, and gain talent, products, and key competencies," he says. "Many strategics have underinvested in their core business and M&A becomes a good alternative to fund growth and diversify operations. Another driver is cash: financial sponsors and strategic acquirers have abundant stockpiles of cash for deal making, further enhanced by borrowing costs that are near historic lows. Business confidence fueled by improved economic outlook has also been a positive catalyst."
Business Owner Considerations
For business owners who are open to selling and receive unsolicited offers for their company, the best practices for dealing with an approach should include the following:
- Put together a team of experienced advisors and seek their advice early. M&A requires a well-thought out strategy that requires input from a variety of experts. The earlier you seek expert advice, the better. Fifth Third’s Rob Schipper notes that "offers can come from out of nowhere and frequently have tight time frames. You’ll need to have board members and your team of advisors lined up and on the same page, and you should go to them for guidance early and often."
- Assess your objectives. Proactively review your personal and business strategic goals with your advisors to determine whether a sale would make sense—or if it is better to remain independent on your current path.
- Perform thorough due diligence on the buyer. How well do you know the potential buyer? Do they have the financial wherewithal or expertise to complete an acquisition? Are they a competitor or potential competitor? What is the risk of sharing information? Is there information you may be able to gain for your business through such an interaction? Go into the dialogue prepared versus reacting to the situation.
- Protect your information. While learning as much as you can from the buyers’ initial outreach, be sure to communicate guardedly and avoid sharing too much information early. A best practice is to sign a mutual Non-Disclosure Agreement (NDA), which your lawyer can help you draft, before any confidential information is shared. This can also prevent the buyer from approaching your employees.
- Determine what your business is worth. Get a third-party market valuation so you know what your business is worth and how it creates value. Remember that unsolicited offers tend to be low and that buyers have their own agendas and objectives, which could sharply differ from your own.
- Present your finances effectively. Valuation is driven in large part by your historical financials and future projections. Often privately owned businesses have non-recurring expenses. Normalizing your finances not only helps in determining the valuation and what a deal structure should look like, but it also gives all parties a clear, consistent presentation of the numbers, which can save precious time.
- Prepare for due diligence. Buyers will assess or confirm an offer by conducting diligence on your business. Are all the contracts in order? Do your financial statements follow accounting standards? Are there any key liabilities, such as for legal issues or taxes? Financial advisors, such as investment bankers, are experienced in helping owners navigate the diligence process.
- Enter legal agreements strategically. Once you are ready to go forward with a deal, carefully negotiate the letter of intent (LOI). Before entering into a legal contract such as an LOI, consult with a lawyer who specializes in M&A to make sure you understand the full implications of the deal. "A transparent LOI that clearly sets out deal terms including clear consideration language and the parties’ obligations will leave less to chance and misinterpretation," Schipper says.
- Seek to create a competitive process. Buyers may attempt unsolicited offers to achieve below-market deals. Bringing competition into the process not only enhances valuation and structure, but it also improves process timing. If you intend to sell, do your own due diligence on competitors and other potential suitors beyond the one that called you first. For larger deals, investment bankers can also add significant value in bringing in the right buyers, positioning your company effectively, and running a process to achieve optimal outcomes.
- Be flexible. Even under the best of circumstances, the sale process can be complicated and unpredictable. That is why it’s so important to be ready to adapt along the way.
Fifth Third’s Schipper sums it up this way: "In today’s M&A market, business owners need to be prepared for unsolicited offers. They should know what their company is worth, negotiate meticulously, and stick to their strategic objectives." Commenting on the market outlook for 2022, Schipper said that "based on the current trends, I expect business owners to receive an equal or even greater number of unsolicited offers than this year."