How to handle an approach from a buyer – ‘Bid-defence’

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By Bruce Ramsay, Managing Director, Business Development, Equiteq

It is quite common for successful consulting firms to be approached by prospective buyers. In fact, our data suggests that a third of the deals we process come about from buyers approaching the client.

During a recent webinar, Equiteq Managing Director Bruce Ramsay answered questions from attendees on the subject of how to handle an approach from a buyer and what to do to maximize the opportunity from such an approach.

1. Will my business be worth more if a buyer approaches me, instead of going to market?

Your business could potentially be worth more if a buyer approaches you, as an incoming enquiry is an indication of proactive interest.

However, it is important to gauge the credibility of an unsolicited approach as soon as possible, as many are just ‘kicking the tyres’ and seeing if they can acquire an asset at a knock-down price. Understanding the buyer’s intention early on will help you understand whether this is an endeavor worth following up with or not.

Here’s what to expect from consulting firm buyers.

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What do you do when a buyer approaches you unsolicitedly?

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It is not uncommon for thriving consultancies to be approached by a potential acquirer. However, many business owners fail to prepare for such an eventuality. This often leads to one of three outcomes, a bad deal for you, a mediocre deal, or a lengthy distraction over many months leading to nothing. These outcomes occur when savvy buyer meets first time seller, and only one buyer provides no leverage to the owner in carving out the best terms.

A company sale process is always time-consuming, stressful and emotional. There is a wide array of skills required that go way beyond your undoubted ability to sell high value, complex services to C level in top Fortune or FTSE companies. There are deal process skills that accelerate stages and conclusions while gaining maximum leverage, financial and synergy modelling skills that multiply value, and cool head skills that defend value and save a deal from collapse. Attempting to navigate this without expert support and while running your own business at the same time is usually false economy with high stakes.

Here are reasons why you should define your exit goals well ahead of a transaction.

How to approach your initial meeting

Prior to sitting down to discuss a possible deal with any buyer, there are a number of things and risks to consider before you start sharing information.

  • Who are you dealing with?:

It is vital to know the company you may be selling your business to. Immediately, find out if they have previous experience acquiring consultancies; how deep their pockets are likely to be; whether there is a possibility of cash up front in a deal. These are just some of the things that’ll help you know where you stand in a negotiation.

  • Seriousness of intent:

To avoid wasting your time, establish whether or not you are dealing with the decision-makers. So ascertain early on what their mandate and decision process is. You don’t want a situation where you have spent 6 or 8 months negotiating only to find that the CEO, whom you’ve never met, doesn’t like the asking price.

  • Competitive consequences:

If a deal falls through, consider what happens to all of the client details, strategy and financial information you’ve shared with the potential buyer. Think about how they may use this information if they go on to acquire a similar business. No matter the relationship you may have with an unsolicited buyer, get a non-disclosure agreement signed and DO NOT release any substantive information at the first meeting.

 

What you need to find out at the first serious exploratory meeting

Following your research, if there are any gaps in your knowledge of the above, they should be discussed in your first meeting with them, which should also cover the areas below.

  • What is their strategy and how do you fit in?

From the onset, request clarification on the strength of the company and the broad growth strategy of the firm you are about to join. It is important to determine where acquisitions fit in their strategy and the synergy value of your organization to the buyer.

  • Establish your criteria for a deal

Here, you’d want to know what type of deal the buyer is prepared to offer you for your business and where that fits with your financial and non-financial objectives. For instance, there is no point in continuing discussions if the buyer is unable to offer you a deal superior financially than the alternative of continuing to grow the business and equity value.

Also, many business owners have other non-financial objectives, such as how you and your staff will be integrated into the new entity. There have been instances where owners, used to entrepreneurial control,  have failed to integrate, preferring to walk away and relinquishing part or all of their earn out.

Unsolicited approaches are usually an exciting time for a business, but it is important to remember that there is also a lot at stake if you get it wrong. Don’t take the risk. Speak to an expert at Equiteq.

Click here for more tips on how to defend value in an unsolicited acquisition

Are you a member of Equiteq Edge? It’s full of content to help consulting firm owners prepare for sale and sell their business. Register here to gain full access.

Find the best buyer for your firm and employees

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When selling your consulting firm you will reach the point where you go into exclusive negotiations with your preferred buyer. This is after maybe 30 to 60 have been approached, 10 to 20 have expressed interest and of those 3 or 5 want to do a deal. If price is everything to you, then any buyer will do and no doubt you’ve selected the highest bidder. However this is rarely the case, beyond price there are usually other important exit goals.

There are several factors you should consider before going to market to sell your firm and during the sifting process towards closing a deal with your ideal partner.

Life after the sale – is your objective to exit immediately, do your earn-out and leave, or extend your career? If the latter, then the new home must be a company you really want to be a part of, doing the kind of work that inspires you, and provides you with superior benefits to the freedom and entrepreneurial life you’ve experienced so far.

Brand continuation and independence – are you happy for your company to be subsumed, or is it important that your brand grows as a result of new investment and assets provided by your buyer? Different buyers, financial and strategic, will offer different models and achieving the latter objective is more likely with financial investors than trade buyers, the former is more likely with Big 4 type entities.

Staff protection – how important is their future to you? If the reason for the acquisition includes economies of scale, some will be retained and some will go, so who do you want to look after? Buyer selection is key to how their loyalty is repaid. If most of your consultants came out of the Big 4 or other multi-nationals, they may not want to go back. Whereas others may be keen to be a part of a new company with more interesting work, career path and foreign opportunities.

Cast the net wide – considering the above, it will help in categorizing and prioritizing buyer types that may fit. When you take your firm to market, consider all the categories of buyer that may want your firm for different reasons. The obvious candidates are not always the best. Casting the net wide finds the surprise outliers that may offer a compelling opportunity.

Culture compatibility – after you’ve been presented to potential buyers and interested parties are in play, look hard at their culture. You’re coming from an agile, flexible organization, however if the buyer is a bureaucratic monolith, how likely is it that you and your staff can handle the red tape? If not, then the merger is likely to fail, along with your earn-out and legacy.

Price versus deal structure – You may have some good offers from companies that fit your criteria above, but perhaps one is offering an outstanding price. However, the headline price is likely to only provide 50% cash up front; the rest will (hopefully) come in the earn-out over two or three years. If another offer represents slightly lower total price, but is otherwise a better home for the business, you might seriously consider taking what at first appear to be less generous terms. Here is your opportunity to trade headline price for a better deal structure and/or reduced earn-out risk. As well as the best home for your business, you also want the highest possible likelihood of securing the other 50% of the deal.

Make sure you consider all of these factors throughout the process, because you are more likely to achieve a successful sale that ticks all of your hard and soft exit objectives. You will be richer, happier and more fulfilled when you have looked after yourself, your staff and legacy.

If you want to discuss your exit objectives and need a sounding board, please contact us and we’d be happy to help.

Are you a member of Equiteq Edge? It’s full of content to help consulting firm owners grow and realize equity value in their business. Register here to gain full access.