One of the most common things we hear during the course of our conversations with owners and executives is:
"Well, I’m not actively looking to sell but if the right offer came along I’d certainly consider it”.
This is simply not a smart business strategy. What are the chances that the one company who approaches you with an offer brings the most strategic fit, the highest valuation and the best deal structure?
The only way to ensure that you are getting the best possible valuation is to have multiple competing buyers making offers.
Bringing multiple buyers to the table is important in several ways:
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It creates a climate of competitiveness. When there are multiple buyers, companies who are serious about buying you will come in with a strong offer. They understand the time constraint and the fact that other offers are being entertained. They won’t insult you by coming in with a low valuation or a deal structure that doesn’t offer much upside.
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It ensures that there are companies looking at you for various strategic reasons. The sale of a software or technology company is almost always strategic, and each prospective buyer will consider acquiring you for different reasons: some will look at you as the gateway to new markets; others will want your client list; still others may want your applications or technology. Each company will value you slightly differently depending on the need that your acquisition will address for them.
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It helps you to understand what your company is really worth. We talk to many executives and shareholders who have a valuation in mind that is completely out of line with what is happening in their vertical. When you get multiple offers and they are all in the same ballpark, you can feel confident that your valuation is realistic and the offers are good. Because in the end, only the market can determine your value.
Whatever you decide to do, do not make the mistake of accepting an offer when you are approached. Do your diligence and find out if the offer stands up to scrutiny.
Last year we received a call from a company we had been courting to let us know they had been approached out of the blue and had received and accepted an offer, and were now off the market. They were thrilled that they hadn't had to pay a commission to close the transaction and were happy they hadn't signed with us. We were deeply disappointed when they shared with us the details of the offer they had accepted - they were worth a minimum of two times the valuation proferred by the buyer and had easily left several million dollars on the table. Our fees would have been a minor expense compared to the unrealized revenue they lost in the transaction.
The only way to tell if the unsolicited offer that you receive is a good one is to do some exploratory work in the broader marketplace. The best way to do this is to hire advisors who are experienced in your industry, have a large database of contacts, and know how to bring multiple buyers in with offers. Only then will you know whether the first offer you received is actually the best you can do.