As a part of many lawn or landscape business sale processes, offers are solicited from multiple potential buyers, often including both strategic and financial buyers.
Every business sale process is different, but it is not unusual for several offers to be in a reasonably narrow band near what the market may consider fair market value for similar businesses. There are often also buyers with offers below that narrow band, which usually include buyers that can be regarded as “value buyers.”
It is also not unusual to have an offer that is significantly above the fair market value band. When they arrive, these offers, sometimes referred to as preemptive offers, can be an exciting part of the process. How such offers are handled can significantly impact the financial results of a sale process and how long it takes to complete the process.
Different buyers may value a business differently for many reasons, including differing evaluations of information about the target company and the market, different degrees of risk tolerance, and differences in the status of the prospective buyer.
Here are two stories of how preemptive offers played out in competitive sales processes we managed for our clients.
A few years ago, we represented a relatively large regional, multi-branch commercial landscape company in connection with a business sale. The process was a typical two-step auction process in which we solicited preliminary offers in the form of indications of interest. The plan was to select about four bidders who submitted the most favorable indications of interest to meet with management and conduct additional due diligence before submitting formal offers.
We received one indication of interest that was approximately 25% higher than the others. That IOI came from what we considered to be a credible buyer backed by a well-regarded private equity firm. We were excited that the transaction might be even more well-regarded by the market than we expected. The IOI was strong enough that we seriously considered entering into exclusive negotiations with that buyer, and we immediately planned to include them in the next round of the process. However, some red flags began to appear. The management of the prospective buyer was not very accessible to us for additional discussions. Both management members from the buyer and their private equity sponsor attended the meeting. Still, it became clear that they were not as familiar with the company as we had expected, based on the information provided. Notably, one of the PE representatives asked a question during the meeting, referencing information on a specific page in the confidential information memorandum. There was nothing on that page relevant to the question, and we quickly realized that he had confused our client’s CIM with that of another company he had reviewed. They had scarcely prepared for the meeting at all.
When they came back with their letter of intent offer, it was 25% below the best offers. We had wasted our time with that bidder. Thankfully, we ultimately completed a very favorable and successful transaction with another bidder after proceeding with the process as planned.
In another process we led, two buyers submitted what they believed were preemptive offers, both of which were well above the pack of buyers with perceived fair market value offers. The two offers intended to be preemptive offers were each from respected, private equity-backed strategic acquirers. One was about 10% higher than the other one. We negotiated with both buyers, each of whom believed they had submitted a firm offer that would be accepted quickly. Each seemed somewhat annoyed that their offer was not immediately accepted. The dollar value of the offers increased in negotiations, but only by about 5%. The terms of the offers improved significantly, resulting in a substantial economic benefit to the seller. The ultimate winner was the high bidder in the first round; however, the deal our client accepted was a significantly better offer than the originally presented “preemptive” offer.
Buyers make preemptive offers for several reasons:
- In some cases, the buyer may see more value in the acquisition than other competitors. This might be because they know more (or think they know more) about the target than other bidders. It may also be that they perceive greater value in integrating the target business and their existing business than other bidders. For various reasons, they also may give greater weight to that value than other bidders do.
- Buyers may be in a hurry to complete one or more acquisitions and believe that a preemptive offer may allow a transaction to be completed much more quickly than if the planned process were to proceed as planned. They may have set expectations with their own investors as to how quickly they can complete a series of acquisitions. An acquisition may be an important factor in achieving the specific goals of the buyer.
- Some buyers truly dislike being involved in an organized sales process for many of the same reasons sellers are well-advised to consider conducting one.
- Buyers may also submit a preemptive bid primarily to ensure that they have a seat at the table as the number of bidders is reduced in a second round. They may or may not have completed enough analysis to justify the bid they have made.
Once a seller begins to negotiate exclusively with a buyer who has submitted a preemptive offer, the dynamics of the negotiation may change. The element of competition may be diminished.
A buyer who has submitted a preemptive offer may still lose interest, even though a nonbinding letter of intent has been signed. This can happen for many reasons:
- As the buyer conducts due diligence and learns more about the seller’s business, they may uncover aspects that make it less attractive.
- They may become aware of other acquisition opportunities that they find more attractive than the one being offered by the seller. We sometimes refer to this phenomenon as “the bigger, better deal”.
- There may be adverse developments in the buyer’s business, the seller’s business, the industry, or the broader economy that tend to reduce the value of the proposed transaction.
When a buyer reconsiders a transaction, they might take one of several actions:
- They might terminate the letter of intent and end discussions.
- They might try to negotiate a modification to the proposed terms of the acquisition, such as lowering the valuation or reducing their risk by converting a portion of the proceeds to an earn-out. This process is often called retrading.
- They might slow down the process, taking more time to complete due diligence and other acquisition steps than communicated initially, giving themselves more time to evaluate the situation and reach a conclusion.
This scenario can put a seller in a difficult position. If the proposed transaction does not proceed, the seller may have lost precious time in finding the right buyer. The seller may be tempted to accept a lower valuation or other unfavorable terms to expedite the process. The Buyer knows he holds an advantage.
Accepting a preemptive offer too soon can put a seller at risk of not achieving their goals in a business sale or having the process take longer than anticipated. Time is an enemy because the longer a transaction takes, the greater the risk that unforeseen developments will derail it. Buyers who submit an offer intended to be preemptive may try to put pressure on the seller to act quickly without fully considering their own options and personal circumstances. If the seller’s business is attractive, it is unlikely that a preemptive bidder’s artificial deadline is set in stone.
Sellers should take potentially preemptive offers seriously and carefully evaluate them with their advisors. Ideally, they should utilize the business sale process to ensure they secure the best deal possible, one that meets their own unique requirements, and that they have more than one buyer. One buyer can quickly become no buyers. Sellers should also avoid being bullied into accepting an offer before they are ready.