I got a call from a guy – let’s call him Steve – who has a twelve-million-dollar-a-year heating and air conditioning (HVAC) business. Steve, along with his sister and mother, inherited the business a year ago when his father died at age 70 after 35 years of building the business.
Steve was looking for advice because he had been approached by a much larger HVAC business looking to expand. Although Steve hadn’t been looking to sell, getting an unsolicited offer of $11.5 million (just shy of 5 times their EBITDA last year) got his attention.
After talking to his controller, a few key installers and his HR manager, Steve signed a Letter of Intent (LOI), giving the potential acquirer 60 days to do their due diligence, during which time Steve is restricted from negotiating with anyone else.
Steve’s reaction was natural, but he is regretting his haste. Now that the LOI is signed, one of the partners from the buying firm says their offer of $11.5 million was too rich and the business is actually worth around $9.5 million.
In my view, Steve made some serious mistakes. Here are four things to do when you get an unsolicited offer to buy your business:
1. Slow down.
Steve’s business has been around for 35 years, so there’s no rush. It’s typical for acquirers to create a sense of urgency; once they have their target in sight, they want to go in for the kill, which is to get you to sign an LOI, giving them exclusivity to pick over your business without other acquirers applying pressure to the price or process.
2. Do not sign anything until all the fine print has been discussed.
Once you sign an LOI, you lose your negotiating leverage. One reason Steve’s deal is melting away comes down to the bonuses on the P&L. Steve’s argument is that the employee bonuses paid last year should not be treated as expenses on the P&L (thereby increasing the EBITDA line) because the larger company would not need to pay bonuses, given that it has a rich pension scheme. I’m not sure I agree with Steve’s logic, but in any case, this is an issue Steve should have discussed before signing the LOI.
3. Do not tell your employees.
Would you tell your kids the family is going to Disney World if there was only a one-in-three chance you would actually go? Once you tell your employees, your business can spin out of control on a sea of innuendo. It’s legit to allow the would-be buyer access to a couple of senior people, but not to the rank and file employees.
In Steve’s case, the acquirer wanted to talk to all of his hourly employees before closing the deal. Why would the acquirer want to do that? 1) to find out if they have concerns about the transaction; 2) to get access to employees they would like to hire if the deal falls apart; and 3) to rob Steve of even more negotiating leverage – once his employees know, it will be very hard for Steve to walk away from the deal when the acquirer drops their original offer price, which they will most certainly do if they sense Steve has to sell.
4. Get representation.
A good M&A professional would charge Steve 4 or 5% of the deal, and I would suggest the $500,000 is money well spent (I’m not an M&A professional so I can say this in good conscience). Steve has now lost his negotiating leverage because he has signed an LOI and told some of his employees. The buyer is threatening to drop the price to $9.5 million and will likely drop it further as Steve struggles to juggle the roles of company CEO and M&A professional. Would you spend $500,000 to save $2,000,000? A good intermediary would have gotten a couple of competing offers (there are hundreds of private equity firms salivating for deals like Steve’s business) to gin up the price and ensure the price stuck through due diligence.
It’s both flattering and intoxicating to get an offer from someone who wants to buy your business. While the offer is a great first step, there is still a lot of chess to play and avoiding some of Steve’s mistakes will allow you to hang on to as much leverage as you can in the negotiating process.