BEWARE OF THE TIRE KICKER

You might think an unsolicited offer to buy your company is a good thing. However, if not handled properly, these proposals can be a real drain on your company’s performance.

We are often contacted by a business owner after he has been approached by a buyer. He usually wants information from us on the merger and acquisition process, which we are happy to provide. He plans to wait, however, to engage our firm to sell his company “until this situation with the buyer plays itself out.”

Frequently this starts a kind of death spiral. Not to sound overly dramatic, but this rarely has a happy ending.

These supposed buyers will drain your time and resources, distract your focus away running your business and your maintaining your company’s performance. They want to buy your business but only as the only bidder, and only if they get a big discount. They will kick your tires, kick your tires, and kick your tires some more.

If the business owner does finally get an offer after months of this behavior, it is frequently woefully short of expectations, usually to the surprise or chagrin of the owner. The second potentially disappointing outcome occurs when the offer finally does come and the owner doesn’t know if it is good or bad. Lastly, once the buyer has tied up the owner with the LOI, he then proceeds to attack transaction value through every step of due diligence. Since he is the only suitor there is nothing to curb his bad behavior.

This is extremely costly to the business owner. Many owners repeat this process several times before they finally acknowledge the damage which is being done to their business. When they do eventually hire a merger and acquisition firm, the company value usually has suffered substantial erosion.

Even though we have watched this situation unfold time and again, we are always frustrated by our lack of success in changing the owner’s incurable optimism about this buyer.

Being the deal guys that we are, we decided to come up with a creative solution and an inspired deal structure that would move the business owner toward a better outcome. If we feel so strongly that this, we should be willing to “carve out” that buyer in the form of a discounted success fee.

By George, that’s it!

If an owner has an identified buyer, we incorporate a sliding scale discount on the success fee if this identified buyer does indeed become the actual buyer. If he completes the transaction very quickly the discount is big. If the deal closes after five months of our M&A work, the discount has slid to zero because we have thrown him into the mix with several other qualified buyers and his offer will have been leveraged higher by 25% or more.

The benefits to the business owner are meaningful. First, if this is indeed one of those rare occurrences where a legitimate buyer presents with a legitimate offer, the owner will not pay a big success fee for a small amount of work. Secondly, the owner can turn the burden of the process over to the M&A firm, freeing him up to keep running his business during the process. Next, we stop the endless, resource draining, tire kicking that erodes business value.

Finally, by changing the transaction from a dutch auction with one bidder into a truly competitive bidding process involving a number of fully qualified buyers, the owner will not have any doubts that he recieved the best return the market had to offer for his business.

Although the information in this document has been obtained from and is based upon sources. The EBIT Associates, Ltd. (“EBIT”) believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute EBIT’s judgment as of the date of the document and are subject to change without notice. Past performance is no guarantee of future results. This document is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. EBIT shall not be liable for any action taken in reliance upon this document. The information herein does not take into account the investment or tax objectives or financial or legal situation of any particular person or entity. You should obtain advice from your financial, tax or legal advisors based on your own individual circumstances before making an investment decision. Neither EBIT nor any other person accepts liability whatsoever nor any loss (howsoever arising and whether direct or consequential) from any use of the information contained herein or otherwise arising in connection herewith.
Copyright © EBIT Associates Ltd., 2010