Is that unsolicited offer of a new job or to buy your company too good to be true?
January 16, 2020
By Martha Sullivan, CPA, CVA/ABV, CM&AA, CEPA
Partner, Succession Planning Practice Leader
Martha leads HK’s succession and exit planning services division and is a regular contributor to Wisconsin’s InBusiness digital magazine.
We just came through that time of year that’s often filled with surprises and gifts of things you had no idea you needed. Sometimes the offering is a delight — “The winning Powerball ticket? I love you!” Sometimes it just simply catches you off guard — “Bacon-flavored toothpicks? Wow. I didn’t know these even existed.” Either way, since you were taught manners from an early age, you know to react with a sense of graciousness and gratitude. You can easily figure out what to do with this unsolicited offering.
In business dealings, unsolicited offerings are equally surprising, such as when someone reaches out to you and offers to buy your company or your home, or contacts you to offer you a job at their company. These things happen. In fact, a few months back, a woman knocked on our door. She and her husband had sold their house quicker than they thought they would and now they needed to find someplace quickly. Our home’s location, style, and yard were “just what she was looking for.” Was this for real? Was it too good to be true?
I had several reactions, ranging from being flattered to wondering whether we should seize the opportunity simply because it knocked. Or, should we dismiss it out of hand because we have no intention of selling and moving in the near future? If she had knocked on a day when the demands of home ownership were right in our face, like the day when we did a full teardown of our gardens, our attitude may have been much different. On that day, we may have been in a “hell yeah” frame of mind and cooler heads would not have prevailed.
This got me thinking about the head rush that a business owner has when they receive an unsolicited offer to buy the company or the one professionals get when they answer that head-hunting call. This happens more frequently these days as employers are desperate for hires and companies are looking for other companies that are the diamonds in the rough that can help them grow, deploy capital, and gain competitive advantages. In the latter case, we often get called up by the owner either asking what they should do or sometimes, if it’s after the fact, what they should do now that the deal is done.
Hopefully, the call comes earlier than later. In fact, there are seven reasons why an owner should pause before acting on an unsolicited offer:
1. Out of the blue
You weren’t thinking about selling for some very good reasons, whether it’s because you’re having fun in the business or you want to keep the company in the family. Perhaps you know that there are things that need to be improved to maximize your value. You’re not on the same wavelength as the other party. In short, you’re responding to someone else’s prodding, not your own needs.
2. Early bird gets the worm
Chances are very high that the buyer is hoping to get the company for a steal. Think about it. What does the other guy know about your business? How did he or she get that information? How did they come up with their offer and value? How does that compare to how others would view the value of the company? Do you know whether the price is reasonable? Or are they just busting a move?
3. Off balance
Unsolicited offers catch you off guard and off balance. From the outset, you are placed in the position of being reactive, not in control of the situation. Issues of price, structure, and other elements are framed, at least initially, with little input from the sell side. This sets a baseline that may be challenging to shift. You’ll have to work hard to rebalance the negotiation platform.
4. Do I know you?
What do you know about the other guy? What is their true reason for interest in the business? Have they done this with other companies? How well have those acquisitions gone from that seller’s perspective? Is this party the best fit for your company, employees, customers, and so on? Even when you do know them ahead of time, what do you know — based on data-driven facts — versus believe because of anecdotal or industry chatter?
5. Competing against yourself
In a race of one, the racer is competing with themselves. In the case of an unsolicited offer, you have nothing to compare to. As a result, you end up competing with yourself and assumptions about the market. You want to know what the market will bear. How would the offer look if you got organized and officially marketed the company for sale? Dollars to doughnuts, if you take a solo, unsolicited offer, you will leave money on the table.
Competition is the seller’s advantage. Owners rarely have experience negotiating the sale of a company, whereas the party making the unsolicited offer has likely done this before. It’s a buyer’s dream come true to be the only one at the table, which is why more and more of them are using this cold-call approach and contacting your company. However, the buyer’s dream could be the seller’s nightmare.
Think about our house situation. We could have thrown out a number that we would have been OK with and struck a deal with the woman. Yet if we placed an ad for the house and alerted other inventory-starved buyers to the opportunity in a hot community, it’s likely we would get even more money than our number. We also would have had more choices about structure — which contingencies would be acceptable or not — as well as more control over the timing.
6. Business readiness
Consider our house again. We keep it in good shape. All the mechanicals and the roof are relatively new. But there are certainly things we would do to get the house in prime selling condition that would enhance its salability and value. Plus, we need to gather data on comparables and get a realistic view of what the market is paying for homes like ours.
So, what condition is the business in? Is there a management team in place that can operate the company just as well without you as with you? Can the company continue to generate the results it does without you? How high is your reliance on your top customers? How strong are your systems? Simply put, just how transfer-ready is the company? If the answer to any one of these is “no,” you’ve got serious work to do, otherwise the deal may likely have an earn-out and/or seller financing component to it. If the company can’t fare as well without you as with you, those earn-out/seller financing payments may ghost on you.
Do you know what value is reasonable for the company? If you don’t know what the current value is (and why), you may have seller’s remorse after you decide to or decide not to sell.
7. Personal readiness
You’re probably not properly prepared for this unsolicited conversation. Financially or personally. Do you know what you need to receive in terms of liquidity from your business to be able to live comfortably? The unsolicited offer may or may not be enough, depending on the price, terms, conditions, and structure. If it’s not enough, what sort of bind does that put you in overtime?
If you don’t need a lot of liquidity from the business, how does this deal align with your thoughts on legacy and what you would like to see happen to the company in the future? Are the dollar-signs aligned with your goals and objectives, or are they acting like a distracting, shiny light?
On the personal side, do you know what you want to be doing the day after the champagne glass is set down? Are you ready to shift to that right now? Is your family ready? With dollar signs dancing in front of you, this may be the easiest and most dangerous consideration to blow off. Money can do many things for your life, but giving you the levels of social, physical, and intellectual interaction you need to be healthy isn’t necessarily one of them.
You may be assuming that I’m 100 percent against unsolicited offers. I’m not. Unsolicited offers are extraordinarily positive and powerful. I believe they are karma’s way of giving you a call to action. They should be entertained in a thoughtful and deliberate way.
What I am 100 percent against is getting caught up in the moment. Too often I hear of seller’s remorse because their enthusiasm swept them along, they believed they could handle the transaction without experienced advisors guiding the negotiations, they unwittingly left dollars on the table, or they didn’t do sufficient seller due diligence on the buyer.
If you get an unsolicited offer, pick up the phone and call your trusted advisors. Use it as a launching pad for the conversations you may have been putting off. Do your homework.