29 Jul Got an Unsolicited Offer to Buy Your IT Services Company? Do This First | Shoot the Moon
Got an Unsolicited Offer to Buy Your IT Services Company? Do This First | Shoot the Moon
Inbound interest is at an all-time high for IT services founders. In this episode, Mike Harvath and Ryan Barnett unpack what happens when a founder gets an unsolicited offer: why the first offer is rarely the best offer, what a no-shop clause actually locks up, and how “deal facilitation” differs from running a full sell-side process. You’ll also learn the mistakes founders make trying to roll their own deal, when to bring an advisor in, and why an advisor adds leverage without taking control.
Your phone is ringing off the hook with buyers. One of them just made an offer. Now what?
Most IT services founders field calls every week from strategics, private equity corporate development teams, proxies, telemarketers, and M&A advisors. Eventually one of those conversations turns into a real number. In this episode, we talk about the moment a founder says “I already have a buyer” and what has to happen next to protect value.
We cover why first offers are typically un-optimized, what’s actually binding in an LOI (hint: mostly just the no-shop), and how the absence of competitive tension changes your leverage. We get into the specific levers buyers pull, including structure, earnout design, working capital, and reps and warranties, plus Mike’s rule of thumb that there are roughly 150 things to negotiate between LOI and close.
We also break down the two paths an advisor can take with you:
- Full sell-side process. Valuation, marketing materials, a managed buyer outreach, and a short list of qualified buyers. Maximum options, maximum competitive tension, best fit.
- Deal facilitation. Meeting you where your head already is. You’ve talked to buyers, you may have signed an LOI. Narrower scope, lower price tag, focused on evaluate, negotiate, structure, close.
- Diligence defense. Pre-diligence on your own financials so a buyer can’t erode price by “discovering” issues you should have found first.
Finally, we address the control question head-on. Advisors don’t take control of your process. You make every final decision. What you get is leverage you can’t manufacture on your own.
Key takeaway: don’t engage emotionally, validate the buyer’s credibility and certainty to close, get clear on whether you’re selling in or selling out, and make a phone call before you respond to that offer.
Related Episodes in the Sell-Side Master Class
Part 1. Knowing When It’s Time to Sell: Listen now >>
Part 2. Get Your House in Order: Listen now >>
Part 3. Valuation Drivers: Listen now >>
Part 4. What is my Take Home? Listen now >>
Part 5. It Takes a Village. Listen now >>
Listen to Shoot the Moon on Apple Podcasts or Spotify.
Buy, sell, or grow your tech-enabled services firm with Revenue Rocket.
EPISODE TRANSCRIPT
Mike: Hello, and welcome to this week’s Shoot the Moon Podcast, broadcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. As you know, if you tune in regularly or maybe if you don’t, Revenue Rocket is the world’s premier M&A advisor to tech-enabled services companies. With me today is Ryan Barnett. Welcome, Ryan.
Ryan: Hey, Mike. Thanks for having me. We’re missing Matt today.
I’m looking forward to talking about a topic that I think is core to what we’ve seen the last few weeks and the last few months. On this podcast, we always talk about issues impacting leaders of IT services firms. And one of the things we’re seeing is a huge uptick in people reaching out to them for the purpose of acquiring them.
It’s not uncommon for us to talk to a managed service provider who says, “Hey, you’re the eighth person to talk to us this month. My phone is ringing off the hook and I’ve just had to turn everyone away.” And sometimes there’s an offer that comes through that’s probably worth taking a look at.
So what I want to talk about today is the concept of what it means to engage in a “deal facilitation,” where you’re talking one-on-one with a potential suitor, and what that might mean for your business versus going across the whole market.
Mike, let me start with a general question. We’re seeing more founders come to us saying, “Hey, I already have a buyer.” What changed in the market that started bringing this in?
Mike: Well, there are certainly a lot of buyers. Some would argue it’s a seller’s market and continues to be a seller’s market.
Most of you out there running an IT services company know that you get lots of calls every week, and sometimes every day, from suitors looking to acquire your business. And not just suitors: you’ve got proxies, M&A advisors, telemarketing firms, corporate development departments of private equity firms and strategics. All of these people are fighting for your attention to say, “Hey, we’d love to buy your firm.” They do a little research on you and say, “This is right in our sweet spot.” And sometimes it’s not. Sometimes it’s just a cold call and they don’t really know.
So there’s certainly an increase in inbound interest. There are also more educated founders. Founders have access to more tools now to become enlightened about how this process works, and they can move the process farther down the track themselves.
I’d also say buyers are reaching out earlier in some cases, developing a relationship over a period of years, so when a seller is ready to move forward, they think of them.
And there’s this tendency where founders think they’re done before they’ve started. They’ve got all this inbound interest. Maybe they engage with someone who’s mentioned, “We’re looking to pay X multiple.” They provide information, they get to a non-binding LOI at their number, and they think, “This is pretty much done. Now we can engage.” Maybe they think they can manage it through themselves. Or they think, “Now we need an advisor because most of the work is done,” and that it comes at a savings compared to running what we call a full process.
Ryan: So in the scenario you just described, people receive interest, go down a path, send over an unfiltered P&L or balance sheet, do a little preliminary work, and a buyer comes back with a potential offer. Or, to your point, they’ve already issued an LOI with a no-shop clause that gets you out of even thinking about going to market.
When someone says, “I already have an offer,” what’s your immediate reaction?
Mike: My immediate reaction is: from whom? How qualified are they? What’s the likelihood to close? Have you already committed to a no-shop?
It’s really important to know that most first offers are not optimized. They’re simply a number, and in some cases they’re not even real. Because in an LOI, not an indication of interest but an actual LOI, you can say just about anything for an offer. The only binding provisions typically in an LOI are things like the no-shop clause, which means you can’t continue to look for buyers during that period of exclusivity.
The value in that LOI is certainly not fortified. It could be anything. I’m being a little facetious, because generally, unless a buyer is a bad actor, and we’ve worked with some of those representing sellers, they’ll honor what was in the LOI for the most part. They try to, anyway. But it’s not outside the realm of possibility that you have someone telling you what you want to hear, and their plan is to come back and retrade, add structure, or push some risk onto you.
And you certainly miss the competitive tension of running a process, which generally means better buyers, better prices, and better terms. So your desire to make it easy and low-cost may be hurting you when you accept that offer as written. There’s a lot that’s not stated in an LOI that will come out in due diligence and can change that offer wildly from what’s on the paper.
Ryan: So if you’re getting that offer and it’s the first offer you’ve seen, why is that oftentimes not the best offer you could have gotten?
Mike: The lack of a competitive process creates the issue. When you have a lot of competition being managed by an M&A advisor like Revenue Rocket, you get to choose between a variety of buyers, a variety of price points, and a variety of structures.
And it’s not just about price and terms. When you’re working through a single conversation, you tend to focus more on price and terms than on the other components of what makes a buyer effective, which is strategic fit and culture.
That matters especially with private equity-oriented firms or people with professional corporate development teams. These are not ultimately the people you’re going to work with. You may work alongside them, but you should know their job is to find companies to acquire and manage that process from origination to close. They’re professionals at that. You’re not. So you lose leverage there. You give the buyer the advantage. And you set yourself up for an anchoring effect.
Founders also mistake interest for value. When you’re getting a lot of calls, in some ways you have happy ears. You get an offer, maybe you’ve negotiated it up a little, but you haven’t fully optimized your financials, and you haven’t taken advantage of what a third-party negotiator brings to the table.
There are a bunch of reasons why the first offer is often not the best offer, and you need to keep that in mind.
Ryan: And I think we might talk out of both sides of our mouth here. We do quite a bit of buy-side work at the firm. So sometimes when we’re the ones calling, it might be the best offer. There is a chance your first offer is the best offer. In M&A, it only takes one.
But it also means that if you’re evaluating that offer yourself, you don’t have context for what the market is.
So thinking about it that way, Mike, what mistakes do founders make when they take an offer that came to them and try to handle the deal themselves?
Mike: There’s a fair number of them, frankly, Ryan.
Certainly overvaluing their business is one. Thinking their business, because it’s their business, is worth more than it generally is in the market. And sometimes you have buyers who know that going in and offer you that number knowing they’re going to retrade it. They come back with competitive sets and say, “Here’s what the last 10 deals we know about traded at, and you’re asking for a multiple that’s much higher,” once they’ve locked you up in a no-shop.
Then there’s underestimating structure. Typically a buyer can offer more if there’s more risk put on the seller from a structure perspective. There are a lot of ways to do that. Earnouts, for example: if they’re structured tilted toward the buyer rather than fair and down the middle of the plate, that can set you up for failure to hit those numbers. There are certain common levers a lot of buyers pull to get the advantage in the negotiation, and you need to know what those are.
Working capital is a huge one. Negotiating working capital happens in every deal, and there are standards set in the market. You need a representative working for you who can do that effectively, one who’s knowledgeable and has done it many times, to get your working capital harvest out of the business. There’s really only one time you can effectively harvest your excess working capital, and that’s when you sell.
If you don’t have that help, it’s common practice for buyers to land-grab extra working capital, or convince you that extra working capital needs to stay in the business. Because you’ve likely been overcapitalized over time, you’re the most likely to concede on this point. It’s not a fair ask. It’s just a way for them to reduce purchase price by keeping more working capital.
Then the details around reps and warranties. You’ll have a lawyer helping you there, but how you approach reps and warranties, how they’re fortified, how the buyer protects their interest, whether there’s reps and warranty insurance, a holdback, an escrow, or some other mechanism like an earnout or seller note used to fortify those reps, those are all negotiable. And frankly, it’s a mistake founders typically make when they try to negotiate it themselves.
And then there’s emotional decision-making. This process is detailed. I typically say there are about 150 things to negotiate between LOI and close. Part of the challenge becomes: how do you run the business while negotiating and leading the negotiation on those 150 things? It can be very disruptive.
And if it is disruptive, if your business performance goes down while you’re away from it, the buyer will take advantage and retrade the deal toward the end of the negotiation, when you’re worn down. They’ll argue the price isn’t warranted anymore because your business is shrinking.
I’ll say one more thing: the statistics say there’s a pretty low probability the deal actually gets done if you manage it yourself. There are a lot of reasons for that, and we’ve touched on some of them here.
Ryan: Right. And you’ve mentioned working through everything from structure and its nuances, to terms, to working capital, to reps and warranties. There’s a lot for someone to deal with, and it sounds like help is needed from a variety of places.
So when should a founder bring an advisor in if they already have a deal in motion?
Mike: Earlier than you think. If you’re contemplating offers from outsiders and you’ve narrowed it down to a short list, that’s a great time to bring in an advisor.
Some founders just don’t want to run a process because they don’t want the distraction, and it is a distraction. I don’t want to sugarcoat that. So if they’re looking at a couple of offers, what they really need to do is bring someone in before the LOI, ideally.
Now, even if they’ve negotiated an LOI on their own and they’re post-LOI and going to accept it, even if they say, “Yeah, I think we’ve covered everything,” you need someone to help you facilitate getting that deal done. It’s about protecting value and terms, not just price.
The whole effort of diligence defense is a practice area inside our firm. You have to have someone who can understand your numbers well and defend them to a potential buyer without that becoming a distraction for you. You want someone looking at your numbers and doing what I’ll call pre-diligence to see if there are any issues in your financials a buyer is going to dig into and challenge.
Because when they start doing that, they’re eroding value in the price. Remember: the number and the terms in an LOI are non-binding. They can’t get you to a binding price and terms until they’ve done their due diligence and are drafting the legally binding agreement. So protecting value and terms becomes super important.
There’s also a lot of ideation that happens between LOI and close around how to deal with issues that come up: a contract terminating on your side, a large client concentration issue, terms in a specific contract as it relates to transferability. There are things that come up that are very in-the-weeds details, and you need someone with experience to help you navigate them.
Ryan: Right. You’ve outlined a ton of what a buyer brings to the table. And if there is one buyer that intrigues you and makes sense, you’ve established cultural fit and strategic fit, and you’ve aligned somewhat on general terms, it’s often great to engage an advisor. And to your point, ideally before an LOI is written.
When we work with someone on that one-to-one basis, we call it deal facilitation. It’s different from a “full process.”
Mike, can you explain the difference between deal facilitation and a full sell-side process?
Mike: Sure thing, Ryan. In short, it takes less time and less scope to do deal facilitation. It still includes some of the most valuable work an advisor does.
If you think about a full sell-side process, you’re meeting the client at a point where they’re thinking, “I’m considering selling my business and I might want to run a process.” At that point you’ve got to get inside the client’s head, understand what they’re thinking and what’s important to them, get a valuation done, help them understand what that means, develop marketing materials, begin marketing, and bring buyers to the table to qualify, ultimately getting to a short list of buyers. That’s very valuable because it creates competition and helps move toward an optimized value, as we talked about.
When you’re doing deal facilitation, you’re meeting the client where their head already is. You’ve already talked to buyers. You already have some sense of value, likely from competing offers, because the market is speaking to your value. Maybe you’ve signed an LOI, so you’ve already made a commitment to a particular buyer, and you’re saying, “Okay, now what?”
That means we’re not running a full process, and the scope and time involved from us is reduced to helping you get to close. It’s much more about helping you evaluate, negotiate, and structure an existing opportunity. And it comes with a lower price tag, frankly, because the scope is lower.
Do you benefit as a seller? You might. You’re going to save a few bucks. Is it the best path for you? Everybody has a different point in time where they need help and advice, and we want to meet you where you are at any point in the journey.
We’ve had clients in the middle of deal facilitation where we determined the buyer wasn’t correct. They either went back to another buyer they’d talked to and that deal got done, or they decided to run a full process.
So we’re not putting our thumb on the scale on whether it’s better to run a full process or do deal facilitation. If you want the maximum number of options, the highest number, and probably the best fit, running a full process is better. But if you’ve already done all that work yourself, we want to meet you where you are and help get the LOI-to-close process done effectively, efficiently, and with value optimized.
Ryan: Absolutely. That’s where a third-party advisor really adds value: understanding whether this is the right deal, and if it’s not, what the options are. Sometimes facilitation turns into a full sell-side process. Sometimes facilitation leads to business improvement.
If a suitor is reaching out to you and you have this one good one-on-one interaction, having a third person at the table to protect your interests and help understand the full value of your business is critical.
Mike, some founders might feel like they’re losing control if they hand the process over to an M&A advisor. How should founders think about “control” in this process, and where should their mindset be when they’ve already had interactions with a strategic suitor?
Mike: It’s an important question. Advisors don’t take control. We never control that process.
We add leverage, a lot of leverage, to your discussion. And what’s important about adding leverage is that it takes a village to get a deal done. It takes your lawyer. It takes a CPA or accountant or tax advisor. And it takes someone experienced to manage the negotiation with the buyer.
So it’s about partnership. It’s about adding members to your team. It’s not a replacement for you. You’ll make all the final decisions on how this process works, what decisions get made, and how to best navigate with that buyer.
The key is that you get leverage by using an experienced third party that you don’t get on your own. I think that’s the most important point.
Ryan: Last question, Mike, then I’ll let you wrap it up. If a CEO is listening today and they just got an inbound offer, what’s the first thing they should do before responding?
Mike: First, don’t engage emotionally. Don’t start thinking about what you’re going to do once you sell your business. Not yet.
You need to validate the buyer: their credibility, their certainty to close, and their story. Most sellers we talk to and work with want to make sure their employees and their customers are well taken care of in a transaction, and you have to make sure that aligns when you’re talking to a buyer about their level of interest.
Then ask yourself what you want. Do you want to sell in? Do you want to sell out? Do you want to be around for a while or not? Those are important considerations. Understanding the offer, the buyer, and the structure is important, and bringing in the perspective of a third party or an M&A advisor helps you do that. It protects your optionality.
So what we’d encourage you to do is call an M&A advisor and talk to them about what you’re contemplating, whether that’s us at Revenue Rocket or one of our peers in the market. Say, “I’ve got these offers. I’ve got people talking about this kind of offer and it’s interesting to me. What do you know about these guys? What do you know about buyers like this? What do you know about how you can help me? Is this the right time for me or not?”
A phone call can help you formulate your thinking, and we welcome those conversations all the time. We’d love to have you give us a call. We can share some perspective on whether this offer is in the range of what makes sense for you, and if you’ve already signed that LOI and you’re looking for a partner to help you, we welcome those calls as well.
Ryan: Well, thank you so much for a great discussion today, Mike. Really appreciate it. Some great advice. I’ll leave it to you to wrap it up.
Mike: With that, we’ll tie a ribbon on it for this week’s Shoot the Moon Podcast. Look forward to you tuning in next time, when we’ll bring additional perspectives to your M&A thinking if you’re an IT services company. And with that, make it a great week.