Canada: The Unsolicited Call

You are sitting in your office and the phone rings. The caller says "Hello Mr. / Mrs. Business Owner, my name is so-and-so with XYZ Business Brokers, and I have a buyer for your business". This is an approach used by some unscrupulous intermediaries in an effort to coerce unsuspecting business owners into paying a finder's fee or retaining the intermediary for a sell-side mandate.

But some unsolicited calls from intermediaries are legitimate. Any credible intermediary will disclose the name of the interested buyer, and confirm to the business owner that the buyer is solely responsible for paying their fee. In other cases, the call comes directly from a corporate executive or a private equity firm looking for acquisition opportunities. For those unsolicited calls that are legitimate, it begs the question of what the business owner should say and do, or not say and do, assuming they may have an interest in selling.

Given the unprecedented amount of capital available worldwide, corporations and private equity firms are becoming more aggressive at soliciting potential sellers (either directly or through an intermediary) in an effort to uncover proprietary deals and avoid an auction. In general, sellers get the best price and terms through a well-run auction that engages buyers who perceive significant strategic value in the acquisition opportunity. However, in some cases, business owners can get an attractive deal even where they do not pursue the auction route. Proceeding with a single buyer can offer certain advantages, such as reducing the risk of a confidentiality breach and expediting the sale process, which reduces the amount of distraction from running the business. The key when entertaining an unsolicited call is for business owners to keep their options open to the extent possible, so that they do not compromise their negotiating position.

Control the Process

If a business owner is interested in having discussions with an unsolicited caller, they should be sure to control the sale process themselves, rather than allow it to be dictated by the would-be buyer. Here are the steps that business owners should normally take:

  1. First, get clarification as to why the buyer or their intermediary has called. Determine whether they are calling a wide spectrum of possible sellers, or whether they are being selective. Ideally, the buyer has done some homework and thought about how and why the owner's company would be a strategic fit (e.g. proprietary products, key customers, etc.)
  1. Arrange an initial meeting or telephone conversation with key decision-makers within the buyer's organization. Do not disclose sensitive confidential information. (High-level revenue and general information is usually OK). Rather, place the onus on the buyer to explain the reasons for their interest, understand the buyer's decision process and learn as much as possible about that organization. The business owner should also get a sense of whether the buyer can meet their personal objectives (e.g. the length of a post-transaction management contract) and the cultural fit.
  1. If the owner continues to have an interest, they should retain professional advisors to assist them in the process. Involving an investment banker or other intermediary can facilitate information gathering. The intermediary may also be of assistance in obtaining information about the buyer (e.g. prior transactions they have undertaken). Having an advisor also serves as a subtle reminder to the buyer that the business owner is keeping their options open.
  1. The intermediary will help to secure a non-disclosure agreement from the buyer and provide the buyer with some confidential information. This should not include highly sensitive details (e.g. customer pricing strategies), but should be sufficient to allow the buyer to form an initial assessment of value.
  1. The buyer should be asked for an expression of interest, setting out the price range and deal terms they are prepared to offer, based on the information provided to that point. The intermediary can assist the business owner in assessing whether the proposed price and terms are fair, given the nature of the business and prevailing M&A market conditions.
  1. The business owner and their intermediary will need to carefully assess whether they want to approach other prospective buyers. Approaching other buyers could lead to higher value. However, the delay could result in losing the interest of the primary buyer. Alternatively, if no other suitable buyers are found, it could weaken the seller's negotiating positon with the primary buyer. Some buyers will state that they will not participate in an auction process. This statement should be met with skepticism by the business owner, as it suggests the buyer is only interested if they can get a bargain.
  1. If the business owner decides to continue discussions with the buyer, they will provide the buyer with additional information and a management presentation in order to firm up the initial offer in a letter of intent.
  1. Upon receiving a satisfactory letter of intent, the business owner should then afford the buyer a period of exclusivity to finalize its due diligence, negotiate the purchase and sale agreement and close the transaction.

Pitfalls to Avoid

While pursuing an unsolicited call can prove opportunistic, business owners should be wary of potential pitfalls that could seriously compromise their negotiating position, and the likelihood of securing an attractive deal.

  • Premature exclusivity. Buyers will often indicate that they want a period of exclusivity to enter into discussions shortly after approaching the business owner. Granting exclusivity to any party negates the business owner's ability to pursue other alternatives for a period of time, which impairs their negotiating position. As a general rule, buyers that insist on having early exclusivity are mainly bargain hunters who should be avoided.
  • Feeling pressured. A buyer that finds an interested business owner will often try to rush them in order to reduce the likelihood that the business owner will become disengaged, or that they will approach other buyers. Business owners must ensure that they proceed at a pace they are comfortable with. Business owners should remember that they have something the buyer wants, and a serious buyer will not walk away just because the owner wants to be cautious. The buyer should appreciate that the owner is making a serious economic and personal decision. That said, long delays could cause the buyer to lose interest or pursue other opportunities.
  • Information disclosure. Business owners sometimes become enamoured with the prospect that a buyer may be interested in their company, and they disclose highly sensitive information at an early stage in the sale process. This can be particularly problematic where the would-be buyer is a current or potential competitor. While business owners should have a non-disclosure agreement executed, that agreement does not afford absolute protection. Therefore, business owners and their intermediaries should disseminate information slowly, to ensure that the buyer is serious, and secure a comprehensive letter of intent prior to disclosing sensitive information.
  • One-way street. Business owners are sometimes anxious to find out how much a buyer thinks their company is worth, so they focus on providing the information the buyer has requested. However, the first step should be to understand why the buyer is interested in their business and the buyer's long-term strategy and objectives. This will help to the business owner to assess whether their company will be viewed as strategically important to the buyer. If so, that increases the likelihood the buyer will offer an attractive deal.
  • Not seeking professional advice. Business owners sometimes view an unsolicited call as a way to save money on professional fees, including intermediaries, tax advisors and legal counsel. However, the early involvement of professionals is important, to help the business owner through the process and to ensure they are getting a fair deal. Professional fees should be structured to ensure that the interests of the business owner and advisors are aligned.
  • Losing focus on the business. Even where the business owner does not undertake an auction process, they should not underestimate the amount of time and effort involved in selling a business. It is easy to get distracted in providing information to a prospective buyer and to lose focus on the business, or alternatively to make short-term oriented decisions that can have negative long-term consequences. Not only do these actions compromise the business owner in their negotiating position with the prospective buyer, but in the event that a deal does not proceed, it is important that they be left with a strong business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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