MERGERS & ACQUISITIONS: The Trouble with ‘Fishing’
Taking unsolicited calls from those looking to buy your business may feel good, but rarely makes sense.
Many LBM dealers have been peppered with inquiries from unsolicited buyers the last few years. It usually starts with a fax, phone call, email, letter, an in-person meeting request or even a handshake at a conference—stating something to the effect of, “We have a client who is interested in purchasing your company,” or “We are looking for investments in businesses like yours….”
Yes, I know it feels good to hear someone wants you. My advice: Don’t pay any attention to these people. Resist the temptation to buy too much into the flattery, as you’re being baited. Most deals started like this don’t get to the finish line, and the ones that do generally pan out in favor of the buyer, not the seller (you). Let me explain why.
All LBM firms have them: wonderful customers who don’t bid you out. You’ve used whatever tactic you had in your arsenal to get them comfortable enough to trust you’ll treat them right on price. The result? Better margins for you. Those “fishing” for deals/investments are no different. When you take the bait, it usually means they will pay less for the deal in the form of dollars, deal structure or terms. The reality is, buyers/investors love speaking with sellers one on one. Why wouldn’t they? They are happy to waste some time on you, because they know there isn’t anyone keeping them honest. It’s a chance to tilt the table towards them. Some will even openly laugh about it.
Let’s say you still want to go down the path of exploring a deal with this unsolicited buyer. Here’s some food for thought:
1. You’re about to spend a whole lot of time helping this interested party understand your business. To accomplish this feat, you and/or your senior management team will pull focus away from the business. What do buyers pay you on? Earnings. What goes down if you don’t focus on it? Earnings. Most deals take six to ten months to consummate, and buyers will reduce their offer if you don’t hit your budget during the process.
For example, before hiring our firm, a recent client of ours wasted almost all of 2014 trying to get a deal done with just one private equity firm. Most of the time was spent helping the private equity group understand the business and the industry at large. They had discussed valuation initially, but when the review was over and everyone was ready to discuss valuation again, earnings had dropped, and so did their offer. This time would have been better spent focusing on the business, not educating a suitor. A whole year went down the drain and then it was back to square one.