In this five-part series on selling wisely, we’re here to give you all the info you need to navigate potentially unfamiliar scenarios. Last time, we covered the basics of an unsolicited offer: what it is, why SMB owners receive them, the basics of proprietary deals, and the importance of enlisting a trusted business broker to ensure you maximize your outcome.
In this post, we dig into the decision-making process a little deeper. We’ll discuss some of the finer points of evaluating this type of offer, including potential buyers’ motivations, the dynamics between buyer and seller, and why it’s crucial to be intentional at every step. These are tricky waters to navigate on your own, and Viking has decades of experience helping SMB owners get the most favorable terms when selling their company.
Whether you’ve received an unsolicited offer or want to be prepared just in case, read on for key details about the dynamics involved.
Seller and Buyer Benefits
While we’re aiming this series primarily toward owners selling a business, it’s wise to view a scenario from all angles. Familiarizing yourself with the vantage points of both buyer and seller helps ensure you make smart, strategic decisions if you receive an unsolicited offer on your company.
Analyzing Buyer Intentions and Benefits
Every potential purchase has unique circumstances, but the universal condition you’ll find in any unsolicited offer is that the potential buyer believes the venture will be profitable or strategic. However, there’s often more nuance than a simple focus on ROI.
One common reason for unsolicited offers is the pursuit of synergies, meaning a buyer sees an opportunity to combine their strengths, such as resources, market reach, or technology, with those of the target company. For example, consider a large tech company that wants to acquire a smaller software startup. The larger firm may see the potential to integrate the startup’s cutting-edge software into its existing product suite, creating a more competitive offering.
Buyers may also make unsolicited offers when they perceive favorable economic conditions or industry trends. For example, in a booming real estate market, a property development firm might receive an unsolicited offer from another developer looking to expand in a high-demand area. In these cases, low interest rates, ample access to capital, and rising property values motivate the buyer to acquire a company that can immediately expand its portfolio.
The desire for a strategic alignment drives some unsolicited offers. In these scenarios, the buyer sees the target company as a perfect fit for their existing portfolio or a means to diversify their business interests. For instance, a food and beverage distributor might make an unsolicited offer to acquire a successful craft brewery, recognizing the growing consumer interest in craft beer as a valuable addition to their product lineup.
In addition, making an unsolicited offer on your business can have the following benefits for a buyer:
Unsolicited offers typically mean reduced competition for purchasing the target business. With fewer contenders, the buyer may have more negotiation flexibility and acquire the company at a lower price. Reduced competition can also expedite the acquisition process, as fewer parties must coordinate.
Some unsolicited offers grant buyers a unique advantage by establishing exclusivity in negotiations. Since the target business may not be actively seeking buyers, the buyer gains a head start in the acquisition process and might propose a proprietary deal. A proprietary deal’s exclusivity can be particularly helpful in competitive industries, as it allows the buyer to avoid bidding wars, securing a favorable deal without the pressure of rival bidders.
Access to Due Diligence
Unsolicited offers provide the buyer with an opportunity to conduct comprehensive due diligence on the target business. This access to financial, operational, and legal information allows the buyer to thoroughly assess the business’s health and potential..
Weighing Owner Benefits and Drawbacks
While there are many benefits to a buyer who makes an unsolicited offer, there are a few potential benefits to the business owner receiving it:
Since the buyer initiates the offer, the seller avoids the time and effort required to actively market the business, seek potential buyers, and negotiate terms. However, this doesn’t mean you should rush through these deals. Pump the brakes first and secure an experienced business broker who will set the pace and ensure no important steps are skipped.
Reduced Negotiation Pressure
With a motivated buyer, you may face less negotiation pressure and competition to sell your business, potentially resulting in more favorable deal terms. No matter how easy-going the potential buyer is, however, you’ll still be wise to have a business broker at the helm of negotiations.
Since the buyer came to you, you might have a stronger position than if you actively sought buyers — but only if you remember that you are in the driver’s seat. You can set the pace, consult with your advisors, and choose to accept or decline the offer based on your assessment of the buyer and the terms. Always maintain control over the decision-making process.
Eliminated Marketing Costs
Unsolicited offers significantly reduce or eliminate marketing expenses since you bypass the advertising, promotion, and outreach costs required to attract potential buyers. This reduction in marketing costs is advantageous for sellers as it directly impacts the overall financial return from the sale—lower advance costs mean you keep a larger portion of the proceeds. However, it’s wise to weigh these savings against the benefit of attracting multiple offers. An experienced broker can evaluate the scenario and provide valuable insight here.
While receiving an unsolicited offer on your business can be an exciting turning point in your entrepreneurial journey, there is a high potential for costly errors without an expert to handle the details. Some risks inherent in negotiating unsolicited offers include:
- Limited negotiating power
- Missed alternatives, such as mergers or partnerships
- Limited leverage
- Lack of market exposure
Ultimately, to maximize the opportunities of an unsolicited offer and ensure you get the best terms when selling your business, you’ll want the help of a reputable business broker.
Balance of Power: Understanding the Dynamics
As you can see, an unsolicited offer involves a delicate balance of benefits for both the buyer and the seller. Typically, the party with more alternatives, information, and negotiating skills holds a stronger position.
For buyers, a strong position often comes from clearly understanding their strategic goals, financial resources, and other potential acquisition targets. In the case of unsolicited offers, their advantage lies in their readiness to move forward and initiate the transaction, which can grant them exclusivity and a head start in negotiations. However, buyers may have to contend with limitations on their budget or the need to secure financing.
As a business owner receiving an unsolicited offer, you hold power because you possess a desirable asset. Consequently, the unsolicited offer might prompt you to attract more interested buyers — and having multiple interest buyers increases your negotiating leverage. You also have the advantage of knowing the ins and outs of your business, including its financial health, industry impact, and potential growth opportunities.
The balance of power, then, depends on the specific circumstances of the transaction, the motivations of each party, and the alternatives available to them. Effective negotiation involves recognizing and utilizing one’s strengths while addressing weaknesses, ultimately striving to achieve a mutually beneficial agreement. Having a trusted business broker on your side is invaluable if you’re an owner with an unsolicited offer on the table.
Time Management & Professional Advice
The business world moves quickly, and finding the “Goldilocks zone” of responding to unsolicited offers—not too quickly and not too slowly—is a tough call. Here are some considerations about timeliness to keep in mind:
Time as a Critical Factor
Time is critical in evaluating and accepting unsolicited offers as it can significantly impact the deal’s outcome. The adage “time kills all deals” is often true in these scenarios. It emphasizes the practical implications for sellers of delaying a decision and highlights the need for timely decision-making after receiving an offer.
In these situations, delaying a response can lead to missing an opportunity or diminishing the offer’s value. Sellers are wise to immediately contact a trusted business broker to consider the offer’s merits carefully. Prompt action helps you avoid potential repercussions, such as waning interest from the buyer, changing market conditions, or external factors, such as funding availability, that could affect the deal’s terms and overall feasibility. Recognizing the importance of time management and making informed, prompt decisions is crucial for sellers when assessing unsolicited offers.
Resist Rushed Decisions: Importance of Advised Deliberation
Remember, there is also a risk in responding too quickly to an unsolicited offer. If you don’t take enough time to deliberate and make an informed decision, you risk the adverse consequences we listed above. If you find yourself under pressure from an eager buyer, consider these tips:
1. Seek Professional Advice:
Enlist the assistance of an experienced business broker who can provide valuable guidance and act as an intermediary in negotiations. (A business broker will also assist and guide you through the remaining items on this list.)
2. Set Clear Boundaries:
Define your terms and expectations early in the negotiation process. Communicate what you are comfortable with and what is non-negotiable.
3. Conduct Comprehensive Due Diligence:
Thoroughly assess the buyer’s background, financial capacity, and reputation to ensure they are credible and reliable.
4. Maintain Confidentiality:
Keep the transaction discrete to avoid external pressures or disruptions. Limit the number of individuals both inside and outside of your organization who are aware of the deal.
5. Take Your Time:
Resist making rushed decisions. Eager buyers may push for quick responses, but it’s essential to conduct due diligence and negotiate at a pace that suits your needs.
6. Engage Multiple Potential Buyers:
Consider engaging with multiple potential buyers to create a competitive environment that could lead to better terms. (We do not recommend doing this without a business broker’s expert guidance.)
7. Understand Your Business’s Value:
Be clear on the actual value of your business. Knowing your business’s value allows you to leverage its strengths and unique selling points during negotiations. Business valuation is another area where Viking can immensely help: we offer no-cost, no-obligation valuations for qualifying businesses.
8. Be Willing to Walk Away:
You should always be prepared to decline an offer if the terms do not align with your best interests. This can prevent you from making hasty decisions under pressure.
Even if you feel comfortable with your ability to take the above steps, there is still immense potential for costly errors. Also, you still have a business to run. Seeking the support of an expert consultant is indispensable in these situations. An experienced business broker will have a wealth of experience advising business owners through countless contingencies and will protect your interests.
Red Flags: Recognizing and Responding
A rushed decision is only one potential pitfall of an unsolicited offer. Be wary of these red flags, as they may indicate a bad deal or an untrustworthy buyer:
- Lack of transparency
- Unrealistic valuation
- Pressure tactics
- Inadequate due diligence
- Lack of professional representation
- Negative reputation
- Unclear terms
- Unwillingness to negotiate
Even if you don’t spot these immediately, that doesn’t mean the offer is without risks. Sellers should remain vigilant and conduct thorough due diligence on potential buyers to identify these warning signs and consult an experienced advisor about whether to proceed.
Navigating these scenarios can be challenging, even for the most savvy business owner. For peace of mind and the best shot at maximizing the opportunity of an unsolicited offer, contact Viking Mergers and Acquisitions. From valuation to closing the deal, our team of experts will look out for you every step of the way.
Stay tuned for the next post in our five-part series about selling wisely, where we’ll discuss how to best protect your interests in the selling process.