A private equity firm approached a family owned business directly.
All cash. An attractive valuation. A quick closing. No lengthy marketing process.
The family asked what sounded like a perfectly reasonable question:
“Why pay an M&A advisory fee when the buyer is already at my door?”
Nearly a year later, the proposed purchase price is down $15 million, and the transaction still has not closed.
The lesson is not that private equity is bad. Far from it.
Private equity firms can be excellent buyers. They bring capital, transaction experience, operational resources, and, in many cases, tremendous opportunities for owners, employees, and management teams.
The lesson is something different: When a sophisticated buyer approaches you directly, you need to understand the transaction from their side of the table before you agree to anything.
A strategic buyer may see value in your company because of what it adds to its existing business. A private equity firm views the opportunity through another lens: investment return.
That distinction matters.
A private equity firm raises capital from investors, deploys it according to an investment strategy, and ultimately seeks to return that capital at an attractive rate of return. Before making an acquisition, the firm will typically have modeled how the business can grow, what it may be worth in the future, and how the investment fits within its broader strategy.
There is nothing wrong with that. It is exactly what a professional investor should do.
Years ago, a buyer described his strategy to me in wonderfully simple terms: “Buy at three. Sell at six.”
He was referring to EBITDA multiples.
And he wasn’t doing anything improper. His strategy was to acquire smaller businesses, combine them into a larger enterprise, strengthen management, professionalize operations, reduce risk, and ultimately create a company deserving of a higher valuation multiple.
That is value creation, and good private equity firms do it exceptionally well. But if a private equity firm approaches your company directly, remember this: They have probably done more homework on the economics of buying your company than you have done on the economics of selling it.
That information imbalance matters.
The initial relationship often begins with a senior deal professional.
They call. They visit. They ask thoughtful questions about the company and how you built it. They explain their vision and begin developing a relationship with you. That relationship may be entirely genuine.
Then the transaction enters diligence.
Quality of earnings. Legal diligence. Tax review. Working capital. Financing. Purchase agreement negotiations. Now accountants, attorneys, lenders, operating partners, and other specialists become involved.
Again, there is nothing unusual or inappropriate about this. It is how sophisticated transactions get done. But it changes the dynamic.
The buyer’s advisors have specific responsibilities. Among them is identifying risks and determining whether the financial assumptions underlying the original offer withstand scrutiny.
A quality of earnings team, for example, will examine the adjustments used to calculate EBITDA. If an adjustment is challenged successfully, the effect can be magnified by the transaction multiple.
A $500,000 reduction in adjusted EBITDA on a transaction priced at a 7x multiple can potentially become a $3.5 million valuation issue.
That is why sellers need experienced representation of their own. Because while all of this is happening, you still have another job: Running the company whose performance supports the purchase price.
Sophisticated buyers negotiate both price and structure. The headline number matters, but so do the provisions determining when you receive the money, what remains at risk, and what obligations survive closing.
Consider:
When I was asked to review the situation involving the family I mentioned earlier, the headline valuation still looked attractive.
The problems were deeper in the purchase agreement.
The company’s longtime general counsel was an accomplished attorney who had served the family well for decades. But M&A was not his primary specialty, and provisions involving survival periods, indemnification caps, escrows, and release schedules had not received the attention they deserved.
Those provisions matter because selling a business is not just about how much you receive on closing day.
It is also about how much you keep.
Even the promise of a “quick close” deserves scrutiny. A private equity acquisition may still require investment committee approval, financing, third party diligence, and other conditions before the transaction can be completed.
None of these issues is unique to private equity. Strategic buyers, family offices, independent sponsors, and other sophisticated acquirers negotiate many of the same provisions. The greater risk is negotiating a life changing transaction with only one buyer at the table.
Repricing becomes easier. Diligence almost always produces questions. Some findings legitimately affect value. Others are matters of interpretation or negotiation. But without another interested buyer, there is less competitive pressure supporting the original valuation.
A series of individually defensible adjustments can eventually create a significant difference between the price in the initial offer and the economics of the final transaction. You don’t know what the market would have paid.
An unsolicited offer may be a very good offer. It may even be the best offer available. But without testing the market, you don’t know.
And valuation is only part of the equation. Another buyer might offer a better structure, more cash at closing, less rollover, fewer contingencies, better indemnification terms, or a better cultural fit. Your leverage declines with time.
This is one of the most important dynamics in M&A. The day an unsolicited offer arrives, you have options.
Nine months later, after hundreds of hours of diligence, substantial legal and accounting expense, management distraction, and emotional investment in getting the transaction completed, walking away becomes much harder.
Sophisticated buyers understand this. Experienced sellers and their advisors understand it too.
The best time to protect your leverage is before exclusivity begins.
You do not need to reject the offer, and you certainly should not ignore it. An unsolicited approach from a credible buyer may lead to an outstanding transaction. But you also do not need to negotiate valuation or structure during the first conversation.
Take the call. Listen. Learn. Then get advice.
Obtain an objective valuation and understand the range the broader market may support. You cannot evaluate an offer intelligently without knowing the value of the asset being offered.
Ask how your business fits within their investment strategy.
Understanding the buyer’s thesis can help you understand the strategic value your company may have to them.
Purchase price is only one component of a transaction. Rollover equity, working capital, escrows, indemnification, earnouts, employment agreements, noncompetes, tax structure, and other provisions can materially affect the value you ultimately receive.
Many of these issues should be addressed before signing the letter of intent, when the seller’s negotiating leverage is typically strongest.
A full sale process is not always necessary. Sometimes an unsolicited buyer really is the right buyer, and a well advised bilateral negotiation can produce an excellent result.
But that should be a decision made with good information, not an assumption made because someone happened to call first.
An unsolicited private equity offer can be a tremendous opportunity. It can also create an information and negotiating imbalance.
The buyer may have completed dozens or even hundreds of transactions. The business owner may complete one. That difference in experience is precisely why representation matters.
At Optima Mergers & Acquisitions, we represent founder and family owned businesses on the sell side. Our role is not to work against private equity. In fact, private equity firms are among the most important and valued participants in the market for the companies we represent.
Our job is to make sure that when a sophisticated buyer sits on one side of the table, our client has sophisticated representation on the other.
If someone has knocked on your door with an unsolicited offer, start a confidential conversation before deciding whether to open it.
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