Unsolicited Offers
Why buyers use them and how sellers can level the playing field
Nearly every business owner knows the scenario: A piece of direct mail, an email, or a phone call from someone asking if the business is for sale. You didn’t reach out to them, they reached out to you – this is the Unsolicited Offer.
For the most part these mailers, emails, and voicemails are discarded for another time. The common thought bubble in the business owner’s head reads, “Would be nice, but I haven’t got time to deal with that right now.” If you polled most business owners about whether or not they’re interested in selling, most, we assume, would answer in the affirmative. Timing tends to be the all- important line of demarcation between saying yes and saying no.
Fast forward a few months. You’ve had a tough week. You’ve settled an employee dispute, talked one of your largest customers off the edge, and re- sent the bank your borrowing base three times due to IT issues in your office. “I’m done,” you sigh. So you pull up one of those old emails, an Unsolicited Offer, and you start to read through it. Maybe you’ll respond back just to see what they have to say.
Buyers call this type of opportunity “proprietary deal flow.” It’s their lifeblood. One-on-one with a business owner to discuss the terms and conditions of buying their business. They do this for a living. Most business owners will do it only once.
Can you see the imbalance in that equation for the seller?
Make no mistake, proprietary deal flow isn’t a bad or nefarious thing. Buyers simply want to buy at the best value they can. Sellers want the opposite. It’s a zero-sum game, but neither side should be faulted for their objectives.
Proprietary deal flow works for buyers for the following reason: emotional investment on the part of the seller.
Generally it works like this:
Step 1
Reach out to business owner with Unsolicited Offer.
Step 2
Make a personal connection and request just a few pieces of information (the objective here is two-fold: (1) obtain info to evaluate the quality of the opportunity, and (2) begin building an emotional connection between the seller and the transaction).
Step 3a
Throw out a middle-of-the-road valuation range with numerous caveats that more information is needed to get a better picture of valuation. This is usually high enough to pique interest, but rarely is it highly competitive with comparable transactions.
Step 3b
Follow up with additional seemingly benign requests with light timeline objectives: organizational charts, financial statements, business plans, etc. The goal here is to move the seller along at a slow but steady pace; keeping in close contact via phone and email, building a deeper personal and emotional connection.
Step 4
Provide a more refined valuation – typically this will be on the low end of the original valuation range and they’ll offer numerous reasons why: customer concentration, market viability, geographic diversity, key personnel risk, etc. Some of it may be true, but the intention here is to get the seller to believe any buyer would see it this way and therefore it can’t really be refuted.
Step 5
At this point further diligence begins along with legal documentation. Buyers know that sellers will increase their emotional connectivity to the idea of a transaction as time goes on and the money becomes more tangible and real. Sellers quit thinking about the prospect of other buyers and become tied to the Unsolicited Offer only. The idea of starting over seems as desirable as oral surgery, so you press on. This is the ultimate objective of proprietary deal flow.
Again, it’s not wrong. It’s just business. And it’s usually above board and fair.
So how do sellers turn the tables? How do sellers maximize their value?
Step 1
Identify and prioritize objectives – what do you want out of a transaction? The maximum amount of cash at closing as possible?To see your business legacy continue? To see your employees taken care of? The answers to these questions are paramount in determining how to navigate the transaction process.
Step 2
Engage your advisors. Financial advisor/investment banker (this is a shameless plug for us at Infinity), transaction legal counsel, and tax/CPA counsel are good places to start. You need professional and experienced intermediaries you can trust in order to match what the buyer and their advisors bring to the table, namely transaction experience.
Step 3a
Prepare a robust collection of marketing memorandums and a secure place to share backup data. These materials are designed to promote the best qualities of the business while also addressing risk mitigation and growth opportunities.
Step 3b
Build a list of potential buyers and/or investors. List sizes vary across deal types, but your financial advisor should have a robust network of financial and strategic buyers, typically sourced from private market data sources and the advisor’s proprietary network.
Step 4
Create a competitive market for your business. This is the inverse of proprietary deal flow. This is how sellers cure the imbalance in the transaction equation. The goal is to receive letters of intent from a diverse group of buyers in order to: (1) triangulate the true value of your business, and (2) choose the offer or structure that best meets your objectives (remember Step 1?).
Step 5
Close. Once you’ve executed a letter of intent you’re likely exclusive with that buyer. That said, because you ran a successful process, your buyer knows you have multiple backup options, so their diligence process has to be completed timely and professionally or they risk watching you walk for the next best option. Your advisors should help you keep pressure on the buyers to meet their stated timelines. Time usually isn’t a seller’s friend, so the more efficient the process from start to finish, the more negotiating leverage is retained by the seller.
Step 6
Enjoy the fruits of your labor. Unsolicited Offers are flattering. You’ve built something someone else wants. You should take them as compliments, but you should proceed with caution. Keep in mind the imbalance in the transaction equation and seek to find ways to regain some balance. Seek guidance from your suite of advisors before you begin responding. Or better yet, pass the baton to your investment banker and let them respond. In doing so, your buyers will immediately recognize they are in a competitive situation and will be forced to bring their best offer to the table.
About Infinity Capital Partners
Founded in 2016, Infinity Capital Partners was formed to serve the unique capital needs of lower- and middle-market businesses. Our team of investment banking professionals works hand-in- hand with owners and stakeholders to maximize the value of their objectives. We’ve completed transactions across a wide variety of industries and transaction structures including sell-side transaction advisory, debt and equity recapitalizations, and strategic planning services.
For qualified institutional purchasers only. This document does not constitute an offer to sell or a solicitation of an offer to any asset or security.
