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CEOs

4 Questions to Consider After Being Approached by a Buyer

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So you’ve been approached — a strategic partner, a private equity firm, or even a competitor has proposed the idea of acquiring your company. Congratulations! But don’t crack the champagne just yet. Before diving into the process — let alone signing anything — you’ll want to think through a number of important questions.

1. Is this the right time to sell?

Maybe you shouldn’t be talking to anybody about M&A because your value is increasing so quickly that your best strategy is to focus on execution. Maybe your company isn’t ready to survive the thorough due diligence a transaction will entail. Maybe you’re a few key benchmarks away from drastically increasing the value of your firm.

If you do decide to hold off on M&A discussions, be very deliberate in your messaging. Tell them that you’re flattered, but you are creating value so quickly that you would be selling yourself short by considering a transaction now.

This leaves the door open to a preemptive offer. Maybe the buyer is willing to lean forward and base their valuation on a forecast rather than an historical P&L. Maybe they are serious enough that they will put an aggressive offer on the table to try to shake you loose.

More likely they will take the opposite tack – tell you that they are going to buy an alternate company, and that this is your only chance to dance with them. Take it with a grain of salt – if you are innovating and growing, there will be plenty of dance partners in the future.

2. Is this the right buyer?

Maybe the company that approached you is one of the many firms cashing in on the Series A crunch by hiring teams from cash-strapped startups. Maybe it’s a perennial bottom fisher, throwing lines in the water every which way in the hopes of snagging a value buy.

If you do engage, note that with rare exceptions, corporate development teams don’t originate transactions — they execute them on behalf of product groups. When corp dev calls, you need to find out who in the organization wants you, and why. What is the fit? Ideally there is a champion within their organization who has identified your company as a critical component of their strategy. But that isn’t always the case.

Your job is to find out why they want you, and to then meet with them to reinforce the fit, find new synergies, and drive home your value to them.

Valuation should not be part of the discussion until they know enough about you to be able to have an informed discussion. If they push hard for a number in early discussions, then you are probably dealing with a bottom fisher.

3. What is the right price?

Ultimately, this can be difficult to know without actually testing the market. Based on observations across Corum’s 30-year history, we estimate that in 75% of cases, there is someone willing to pay more than the first buyer who makes an approach. This opens up the danger of personal liability. Do you have fiduciary responsibility to outside shareholders? What are the consequences if you sell without getting competing offers? The consequences can be personal bankruptcy.

Your shareholders are relying on you to look after their interests and maximize their value. Sarbanes-Oxley and other regulatory schemes that followed the dot.com crash have given the shareholders teeth – they can come back and bite you if you don’t take appropriate steps to maximize the value of the company. Normally this means talking with multiple acquirers and fully calibrating the market.

Working with multiple buyers also protects against the whims of potential acquirers. Not too long ago, our firm was working with a CEO in this position. We were having dinner and the CEO mentioned that after talking with us about the potential acquisition, they sat down with the board to discuss the situation. The board said, “We have an offer, let’s just close it,” but the CEO convinced them that they needed to run a proper process: for the protection of their shareholders, to make sure they were getting fair market value and to ensure a successful outcome.

Two weeks after they engaged us, that buyer dropped out. Fortunately, we had already initiated conversation with four others, and ultimately we were able to close the deal.

4. What are the next steps?

If you do decide to proceed with an M&A process, there are a number of steps to take. Protect yourself and your company and get an NDA and non-solicitation agreement in place immediately in case they are just looking to pick your brain and poach key talent. Ask for a due diligence checklist to determine whether you’re in a position to do a transaction, without the volume of diligence distracting your executives from their daily jobs and harming the company.

If you don’t already have them prepared, get your three-year projections together as soon as possible. Few buyers can get final approval without them, and nearly all valuations require them.

Plan to make high level overtures to other potential suitors. Tell them you’ve been approached by someone else, but you always felt they would be good partners. Ask if they would be interested in speaking with you. Managing this outreach while keeping your initial suitor warm is one good reason to hire a qualified, experienced M&A advisory firm.

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