Originally published in American City Business Journals

By Joanne Baginski

A growing number of middle market companies are receiving unsolicited offers to sell their business — given a current economy buoyed by strong corporate profits, low interest rates and the ample availability of capital.

But after receiving an unsolicited letter of intent, what should a chief executive do to drive the best deal possible?

Getting an unsolicited offer can be flattering, especially considering that multiples have soared to levels not seen since 2007, before the financial crisis. The offer can be more than an owner ever thought possible. Companies are fetching average multiples of 10.9-times EBITDA (earnings before interest, taxes, depreciation and amortization) compared to 9.7-times a decade ago, according to Bain & Co.’s Global Private Equity Report. Companies outperforming their peers will attract premium pricing. However, accepting the first and only offer might not be the right thing to do.

Of course, not accepting an offer is very different than saying “No.” Having received an offer, the chief executive should take a deep breath and request time to contemplate it, and then consider these five steps:

1. Know the value of your business.Knowing the fair value of your business in today’s market is crucial. Valuation experts can discern that value for just a few thousand dollars in professional fees, giving the seller invaluable context and insight from which to consider each offer.
2. Know your walk-away number.When the selling process begins with an unsolicited offer, many business owners may not have considered what number would lead them to say “Yes.” A tax accountant can calculate the net after tax cash proceeds. Armed with a walk-away number, an owner can know definitively what price they are willing to accept. Serious negotiations should never start until the owner knows that number.
3. Know your skeletons.All companies have skeletons in their closet, whether it’s an outstanding worker’s compensation dispute or a lingering lawsuit with a customer. Companies should resolve these issues, when possible, or reveal them to the buying side’s due diligence team as soon as possible, detailing how these problems can be mitigated. Issues such as having unrecorded liabilities that are not correctly accounted for (whether that’s paid time off, vacation time and warranty/guarantee liabilities) or problems related to taxes can lead to a portion of the purchase price (as much as 10 to 15 percent) being set aside in escrow until those issues are resolved. While it’s ideal to remedy any such issues before a sale, failing that, sellers should share this information openly with potential buyers.
4. Hire the right team.Selling a company can distract management from the day-to-day operations of running a successful company, so establishing a professional team — an investment banker, an M&A attorney, and an accountant — will allow management to keep running the company so that value is not diminished while the professionals push for the best possible deal. Selling companies should never accept an offer without having the contract reviewed by an M&A attorney, who can work to protect against contingency clauses that can significantly reduce the value of the deal. I have seen one LOI signed that had a contingency clause that reduced the sales price by up to 100 percent if the company failed to perform as expected.
5. Don’t be exclusive.Not so long ago, most letters of intent demanded exclusive negotiations — something private equity buyers still prefer. However, with demand for deals high, this remains a sellers’ market, where sellers increasingly can demand a non-exclusive negotiation clause. That concession then allows the seller’s investment bankers to gather competing offers, whether that’s from strategic buyers or private equity investors. A greater number of bidders will help drive the best deal price or an improved deal structure. A growing number of firms now conduct sales negotiations with multiple buyers right up to the eleventh hour to get the best deal.

Throughout this process, sellers should be cautious during negotiations. Not all deals work out, so the target company should be careful not to reveal too much to potential buyers. That’s especially true when bidders are strategic buyers — competitors that will still be there if the deal falls apart. (As the saying goes, don’t open your kimono too quickly!) Never reveal trade secrets, information about key customer or vendor relationships, or reveal the names of key staff. Finally, sellers should not feel rushed. Taking the time to be prepared in order to put your best foot forward is always a good idea when seeking the best deal.

Joanne Baginski has almost 25 years of public and private accounting experience and leads the transaction advisory services area at EKS&H. She has been involved in more than 200 transactions, working on both the buy and sell sides of deals, and her expertise also includes business finance, financial planning and analysis, and capital financing.