Is that takeover offer too good to be true?

Abstract colorful shape on Business handshake concept on watercolor illustration painting background.

It’s Friday afternoon and you get a phone call from an unrecognised number. The caller is ringing on behalf of a third party that wants to buy your company. What’s your first thought?

You’d feel a strange cocktail of excitement and fear, for a start. The buyer’s price sounded good – excellent, even – but your mind instantly went to all the messy paperwork and ownership you’ve been meaning to sort out for years but never got around to solving. That’s where the fear comes in.

Most business owners would also assume that the leg work of selling will be done by them. No one knows the company better, so they should be quarterbacking the acquisition process, right?

That would be the first big mistake. Let’s use an analogy to explain why.

Many small businesses were founded because the owner had spent thousands of hours becoming an expert in a particular discipline or skill. It may be accounting, software development, construction, horticulture or any of the myriad work roles that exist in the market. The point is that the owner is good at something.

And because of that expertise, they would never recommend that a client “do it themselves.” If they own an accounting firm, think of all the tax mistakes a client could make by filing the wrong paperwork at the wrong time. Engaging with a professional accountant who knows is always the best strategy, despite the fees. Doing so will save plenty of heartache and money.

The same is true for mergers and acquisitions (M&A).

The M&A world boasts many high-quality professionals whose career was built on selling companies with the best possible conditions for a client. These people are just like you in that they are experts in what they do and know all the pitfalls, obstacles, tricks and dangers of their profession. Why? Because they’ve set all those traps themselves, hundreds of times. They know the warning signs of a duplicitous deal and what could turn out to be a nasty negotiation.

It’s easy for an inexperienced business owner to assume an indicative acquisition proposal is earnest and presented without any tricks. But the experienced transaction professional will understand that the buyer probably wasn’t only talking to that client’s business. They were also charming every single one of their competitors at the same time to get a good idea of the lowest price.

In other words, the game had already begun long before the Friday afternoon phone call.

Selling a business sounds easy, but it’s almost never straightforward. Even if this isn’t the owner’s first rodeo with an exit, that isn’t a good enough reason to avoid engaging with transaction specialists at the earliest stage. A decision like that would be a bit like a homeowner helping to carry piping into their home and thinking that qualified them to be a plumber.

Instead, when that initial phone call came in, the astute move would be to thank the buyer for their interest and suggest a time to continue the conversation later. Take a breath and then work out what help you need before seeking out experts in those areas. 

The reason for this is that risk in an M&A transaction is non-linear. Risk tends to rise with the size and complexity of a business. If your company is being targeted for purchase, chances are that it either has attractive revenue streams or it has developed a set of unique intangible assets that others covet. Both aspects will increase the complexity of a transaction significantly.  

A good transaction readiness team will explain that an acquisition – should it go through – might take upwards of 9-12 months once the wheels start moving. It will require a lot of preparation to get your house in order, reconcile contracts, crunch all the relevant numbers and attend many, many negotiations.

The transaction readiness team will also help assess whether the offer is ‘real’ or a ploy to get closer to your company’s crown jewels (trade secrets and confidential information). An expert M&A professional will be skilled at preparing your business is ready for sale, minimising risk and maximising your return on investment.

As negotiations play out, the M&A team will advise the company’s CEO to return to their usual role and focus on building the business. They will explain that the buyer was interested in the company precisely because of how it was operating and the assets it was developing. So, if the CEO now steps away from the tiller to help organise the deal, the business might stumble and spook the buyer.

Buyers are often hoping a target company’s CEO makes a mistake like that since it would allow the buyers to negotiate for a lower asking price. This is a perfectly reasonable strategy (from the buyer’s perspective) but nevertheless one to look out for. It’s not malice, it’s just business.

And it is always wise to assume that the buyer knows much more about the target company than they let on.

While healthy revenue or profit is enough to attract any keen buyer, they will likely be far more interested in the target company’s intangible assets – things like brand, data, IP, trade secrets or software. The entire goal of any takeover attempt is to own these assets for the cheapest possible price and part of this strategy will be to convince the company to sell far below its true value.

Or – and this happens far more often than you might think – some “buyers” will enter negotiations with no intention whatsoever of completing a sale. The proposed deal is a thinly veiled attempt to use the due diligence process to look under the hood at what makes the company special. This is a real threat that reinforces the need to engage with a professional M&A team early.

Selling a business begins with excitement and fear and the white-knuckle ride continues until both parties sign the final contract. Often, due to the way company law works, the trepidation persists for years after the transaction because either party could still back out if they choose. Only a few years after any deal closes does everyone start to sleep well again.

The point of this article is not to scare the average business into never selling.

In fact, getting a chance to sell a company is a proud moment for any founder and group of shareholders. All that work is about to pay off!

But the examples outlined above are only the tiny tip of the iceberg of potential dangers in even the most vanilla M&A procedures. A casual glance at the business newspapers proves takeovers can get very messy, very quickly. Every transaction is different and to an inexperienced seller or negotiator, unforeseen problems are just that – unforeseen.

So, for the same reason you wouldn’t fix a major pipe leak in your own home, it’s a good idea to ask an M&A professional for help when preparing for and executing a deal. Like a good plumber, you want someone who knows which valves to tighten and which pipes to tap with their magical spanner.

Originally published on BusinessTimes

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