You've Received An Unexpected Offer To Sell Your Business: Now What?

For business owners, there will come a time when a business must be transitioned to a new owner, whether that be through a succession plan, taking the business to market in an attempt to sell it, or leaving it to an experienced family member to run after your death.

However, the timing of that transition can sometimes be unexpected.

Why This Is Happening More Often

More and more often, business owners are finding themselves on the receiving end of an unsolicited offer to sell their business to a prospective buyer, whether it be a strategic buyer seeking to add on to their existing operations in the company’s industry, or to a financial buyer or a private equity backed firm seeking to roll up or acquire a series of companies in specific or related industries.

In either case, receiving an unsolicited offer can take business owners by surprise, left to wonder “now what do I do?”.

The First Question: Do You Want to Sell?

The most practical thing that a business owner can and should do is of course evaluate whether they are personally interested in selling at all, and whether it is the right time to sell.

Assuming it is, the business owner should then move to evaluating whether this specific unsolicited offer is one that the owner is interested in, and believes is fair, or whether the business owner could obtain a better deal by going to the broader market.

Protect Confidentiality Before Any Discussions

That said, before having any substantive conversations with the prospective Buyer, and certainly before disclosing any information about the business to the prospective Buyer, the selling business owner should ensure that the Buyer executes a Confidentiality Agreement, or a Non-Disclosure Agreement, so that any information provided to the Buyer as well as the fact that discussions are even taking place, remains strictly confidential.

Understanding the Offer Itself

The offer itself may come in the form of a Term Sheet, a Letter of Intent, Indication of Interest, or some other analogous offer that sets out the high level terms of the proposed transaction.

The offer will likely include both the purchase price itself, as well as other expected terms like the owner remaining in a consulting role for a period of time, restrictive covenants in the form of non-competes and non-solicits, and other customary terms comprising the remainder of the deal structure.

Further, the structure of the purchase price itself will likely be set forth in the offer, including whether it will be paid at closing, partially over time via a promissory note, partially in the form of rollover equity in the case of a financial buyer, whether it is contingent upon the performance of the business following the closing through an earnout, or some combination of the foregoing.

In addition to these key terms to the actual transaction, an LOI itself also will contain other terms that the owner should be aware of, such as an exclusivity period whereby the owner is bound to only negotiate with this specific prospective Buyer for a set period of time.

Evaluating the Buyer

The business owner also should do his or her best to evaluate not only the offer and its terms, but the prospective Buyer itself.

While that may be difficult initially, the business owner should attempt to use whatever resources may be available to them to determine whether the prospective Buyer is legitimate, and capable of financing the transaction, or if they are simply kicking the tires and potentially wasting the business owner’s time and energy.

Don’t Go It Alone

In reviewing the offer and the Buyer itself, the business owner does not need to, and should not, go it alone.

The business owner should include their team of professional advisors to assist them in reviewing the offer and contemplating next steps, specifically their CPA, an attorney with experience in business transactions, and their own financial advisor.

It is never too early to engage with these professionals, and doing so can help the business owner get ahead of key issues sooner rather than later, thus saving time and money.

In addition, these advisors can assist the business owner in determining if the purchase price, structure, and overall terms are in line with what is common in the market, or if there is room to improve the terms based upon what is customary in the market for transactions of similar size and scope.

Final Thoughts

These are of course only very high level, general items to consider, and each company and transaction presents its own unique set of considerations.

If you receive an unsolicited offer to sell your business and are in need of legal counsel, please feel free to contact Austin Stevesnon at RAStevenson@strausstroy.com, or at 513-768-9745 regarding any questions you may have.