Imagine this scenario: you’ve invested years’ worth of time and energy into building your business, and you receive an email or phone call out of the blue offering to purchase your company. What feelings come up? Excitement? Relief? A mix of emotions you’re not sure how to sort out? Any of these are reasonable responses if someone makes a legitimate offer to buy your closely held business.
While your gut reaction is important, you must proceed armed with more than instinct. Selling your company is a pivotal point in your entrepreneurship journey, whether the next step is to acquire another business, start a new one, or retire. In this five-part series, we’ll take you through the ins and outs of unsolicited offers so you can navigate these complex situations with all the savvy and strategy that helped get your company this far.
What Is An Unsolicited Offer?
Let’s start by defining precisely what constitutes an unsolicited offer. These are proposals to purchase your business that you didn’t actively seek or initiate. They may be formal, with details like purchase price, a plan for due diligence, and a transition plan all outlined meticulously. Or they may be informal, as in a casual conversation between professionals.
Unsolicited offers can also encompass a broad range of scenarios, including proprietary deals, an inquiry from a key employee, or multiple offers from various interested parties. No matter how they arrive, or from whom, unsolicited offers can catch you off guard, so it’s essential to establish some foundational insight — particularly regarding proprietary deals.
What Is A Proprietary Deal?
Proprietary deals and unsolicited offers sometimes overlap, but they are not always synonymous. In short, the key distinction of a proprietary deal is exclusivity.
Proprietary deals, or off-market deals, are business acquisition opportunities that are exclusive to one buyer and not publicly advertised. Unlike traditional listings on the open market, proprietary deals are often initiated through personal connections, industry relationships, or targeted outreach by buyers who have identified a particular business as a strategic fit for their objectives. This approach allows buyers to avoid bidding wars and negotiate directly with the seller.
Risks of Proprietary Deals for Business Owners
While opting for a proprietary deal may sound streamlined and appealing, exclusivity often comes at a cost. Here are some of the main risks SMB owners can encounter in a proprietary deal:
By committing to a proprietary deal, sellers forego the opportunity to explore other potential buyers who could offer better terms or fit. (In this blog post, read more about how a business broker attracts multiple offers, what they can do with them, and why it matters.)
Potentially lower sale price
Proprietary deals eliminate a pool of potential buyers, reducing the competition that could drive up the sale price. Without the transparency of an open market, business owners may not receive offers that reflect the true market value of their company, potentially leading to a less favorable deal.
Lack of negotiating leverage
In proprietary deals, buyers often have a strategic advantage, knowing that the seller has limited alternatives. This can weaken the seller’s negotiating position and lead to less favorable deal terms.
Reduced due diligence
Buyers in proprietary deals may conduct less comprehensive due diligence, leading to uncertainties and potential surprises during the later stages of the transaction, which could disrupt the deal or result in unfavorable terms for the seller.
Sellers might miss out on exploring strategic alternatives, such as partnerships or mergers, that could provide more favorable outcomes than an outright sale.
Common Scenarios for Receiving Unsolicited Offers
Knowing why someone would make an unsolicited offer on your business can help you feel more confident if you receive one. Let’s examine specific scenarios that may prompt unsolicited business offers.
In simple terms, these offers come when the target business’s value aligns with opportunities the potential acquirer wants. Here are some common reasons your business might receive an unsolicited purchase offer:
Exceptional financial performance
When a business consistently demonstrates strong financial performance and growth, it may attract unsolicited offers from investors or competitors seeking to capitalize on its success.
A business that receives industry awards, accolades, or media attention for its innovations or achievements may become a prime target for acquisition as competitors aim to gain a competitive edge.
Competitive market position
Businesses that hold a dominant or strategic position in a competitive market segment may receive unsolicited offers from rivals aiming to consolidate market share.
Startups or emerging businesses with high growth potential may receive offers from established firms looking to invest in or acquire innovative ventures to secure future market advantage.
Potential for geographic expansion
Businesses operating successfully in a specific geographic region can receive offers from firms looking to expand their footprint or gain access to new markets.
Innovative intellectual property portfolio
Companies with valuable patents, intellectual property, or proprietary technology can become acquisition targets for organizations seeking to enhance their competitive position through innovation.
Strong customer base and relationships
Firms with a loyal and extensive customer base and strong customer relationships may attract offers from competitors or industry players seeking to acquire a ready-made client portfolio.
Initial Reactions and Emotional Responses
With the above contexts in mind, let’s revisit the scenario we asked you to imagine at the beginning of this piece. Receiving an unsolicited offer can trigger a profound and often unpredictable range of emotions and reactions in business owners. It’s a moment that can be both exhilarating and nerve-wracking as the future of your business seemingly hangs in the balance.
Excitement often stems from the acknowledgment that years of hard work, dedication, and entrepreneurial vision have culminated in a proposition that validates the business’s success and potential. It can be an ego boost and a source of pride to know that others see the value in what you’ve built.
In contrast, anxiety may creep in when the gravity of the situation sets in. You might ask yourself: What does this mean for my company’s employees and their job security? Will my company’s culture and values be preserved under new ownership? What about my personal financial future? These anxieties can be particularly pronounced if the business has been a labor of love and holds deep sentimental value for you.
You don’t want to discount your emotional response, but for the best results, you’ll want to balance that reaction with a rational, strategic response. Here are 7 tips for responding to unsolicited offers on your SMB:
1. Engage a trusted advisor
Our first tip is the most essential advice we can provide: involve a mergers & acquisitions (M&A) specialist immediately. A professional business broker will ensure your interests are represented and will provide expert guidance and insights. A broker can also aid in consulting legal and tax experts to understand the ramifications of the proposed deal.
2. Maintain confidentiality
Treat the offer with discretion and avoid discussing it within your organization until you’ve assessed its validity and potential. Confidentiality throughout the selling process is critical for many reasons. You can read this blog post for a more detailed discussion about why it’s so essential.
3. Conduct due diligence
Thoroughly research the prospective buyer to understand their intentions, financial capacity, and track record in acquisitions. This is a step where meticulousness is vital and having the expert eye of a professional broker can reduce the potential for error. Remember, you’ll still be running your business, and this added demand can significantly compromise your focus.
4. Assess strategic fit
Evaluate how the offer aligns with your long-term business goals and whether it complements your existing strategies. An experienced broker can also provide insight into this process, evaluating the buyer’s offer, professional history, and future plans alongside your priorities and wishes.
5. Clarify deal terms
Seek detailed information about the offer terms, including price, payment structure, and any contingencies, such as regulatory concerns or third-party consents. Having a professional broker on your side to safeguard your interests and get you the best terms is crucial at this stage.
6. Begin negotiation
If the offer is appealing, be prepared to negotiate terms that better align with your interests and objectives. While you may be accustomed to making deals as the leader of your company, business brokers specialize in these types of negotiations, which will prove advantageous for your interests — and your peace of mind.
7. Maintain control
Remember that you have the final say in accepting or declining the offer; do not feel pressured to make a hasty decision. If you decide to decline the offer, do so diplomatically and professionally, leaving the door open for future opportunities. Regardless of your decision, use the experience to reassess your business strategy and plan for future growth or exits.
Bottom line, if someone wants to buy your company, that’s a sign you’ve been doing something right. When considering the offer, think beyond your emotional reaction to the logistics of the deal and what will happen afterward, both for you personally and for the business.
Next in our series, we’ll examine the essential considerations for evaluating unsolicited business offers. Our goal for the series is to equip you with a comprehensive understanding of unsolicited offers so you can maximize any opportunity that arises and sell wisely.
Whether you’ve received an unsolicited offer or just want to be prepared, Viking Mergers and Acquisitions is here with expert advice and decades of experience. We’ll assist every step of the way, from the valuation of your company to closing the sale. Reach out today for a complimentary consultation.