Our Corporate Finance Partner, Steve Plaskitt, shares his advice on business deals following the news that Asda and Sainsbury’s will be merging…
Last week it was announced that Asda Walmart was to buy Sainsbury’s after the two chief executives reportedly hatched a plan to merge together in an off market deal.
Sainsbury’s were not for sale but through the approach and careful negotiations behind the scenes, the two supermarket giants were able to announce a deal together and surprise the market. Sainsbury’s CEO sang “we’re in the money” and became a social media meme!
For most SME business owners, an off market approach from a buyer is not this simple.
Handling an unexpected approach from a buyer
Firstly, whilst an approach is always flattering, you need to understand whether it is focused and genuine. Is it a letter or email to see if you (and dozens of other company owners) would consider a sale? Or is it a genuine approach, where the buyer has looked at the market and decided upon you as their best way to grow?
The best and most genuine approach is where the potential buyer has known you for some time. This can be through trading relationships or through previous dealings. This was reportedly the case for Sainsbury’s and Asda, as the two CEOs had worked together previously.
Do you know why have they approached you?
Once established that the approach is genuine, you need to know why they have approached you. Is it, for example, for your people, technology, products, capabilities, niche market position, or geography? Or is it that they have growth targets that they cannot obtain without an acquisition? Are they looking for new market ideas and want to speak to competitors? Sometimes these interested parties may look genuine, but are only interested in buying on their very low valuation terms.
For all cases, be careful what information you reveal and keep items confidential, particularly if interest comes from a competitor. Instead of “Caveat Emptor”, i.e. let the buyer beware, it is the seller that should be wary in these situations.
Establishing your valuation expectations
Your corporate finance adviser should help you to establish what your valuation expectations should be and whether their offer is too low, at a fair price or at a great one. The adviser will help to benchmark their offer, identify other areas of value and ultimately improve the offer.
Be open to other options and ideas. If one company has shown interest in you, do not believe that they are the only one. Other options, such as a management buy out, carrying on as you were or seeking other buyers, are always available. If initial negotiations aren’t going as well as you think, you will be able to use the prepared information pack to send to other buyers and reach out to them again under the terms of a confidentiality agreement.
What to do after finding a buyer
If you have met with the potential buyer and believe that you can work with them going forward, then you should ask them to make an indicative non-binding offer.
The offer is of course negotiable. You will need a few weeks and greater sharing of forecast information in order for the offer to be increased and developed into a set of heads of terms which explains the key aspects of the deal. Only at this point should you work exclusively with the one buyer for a few months to allow the deal to complete.
How to identify if the deal will work
To identify whether the deal will work, identify specific synergies between buyer and seller, and co-develop a business plan for your company under their ownership. This has to be a two way, non-confrontational process. Spend time on this joint plan and consider the integration of the companies, the savings and the new opportunities e.g. for sales growth and technology sharing.
The corporate finance adviser and the buyer can co-develop the process. This ensures that it is appropriate and not disruptive for your time and for the business. Sharing information through an electronic dataroom in a careful, co-ordinated way demonstrates that you can control a process. It also builds confidence in your systems and information control.
Personalities and egos can be an important factor to see if the deal can work. Do you believe you can work with and report to the buyer? We have seen many deals fail as the vendor realises he cannot work with the buyer after months of negotiations.
In these circumstances, pick yourself up and reflect what you have learned from the process and from their approach.
Lots of hard work and a co-developed, co-ordinated approach may eventually lead you to be singing “we’re in the money.”
If you would like to discuss this in more detail, please contact Steve Plaskitt.