Acquisitions · Startups

How to handle acquisition offer from a competitor?

Nikola Aleksić QA Tester

December 12th, 2016

Recently we got an acquisition offer from a company that is a potential competitor. They are strong in a different segment of the market and we feel strongly that it would be very hard for them to get our part of the market without our acquisition.

We are not prepared to sell if the offer is under certain multiple but they dont want to disclose the bid unless we provide them with detailed information. We are worried that its just a fishing expedition to get more details how our business operates. They supplied NDA to sign which should protect us. In theory, but in practice I am not that convinced.

The sale price would be in 7 figures. I am toying with an idea to get from them like %0.5 sale price nonrefundable deposit and disclosing the minimum multiple they need to offer.

I am aware that it may put them off, but we are not looking to sell and just worried about disclosing information if it does not lead anywhere.

Has it ever been done? Is it a mad idea to ask for this? Am I better off just giving them information and proactively trying to contact other potential buyers to drive up a price instead?

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

December 12th, 2016

I don't know the custom where you are but in the US the best response would be "make me an offer."  In most cases they are buying sales or profits, as you said a "multiple". You can give them those two numbers and if they make an acceptable offer you proceed to a purchase agreement with a provision that they can do a suitable amount of due diligence after they put down a deposit. There are no free looks. You are right to be skeptical. They want to get into your market. If you do not sell to them they will find another way.  A good lawyer should be able to work this out for you in accordance with local custom and local law.

Steven T.A. Carter

December 12th, 2016

Don't rely on an NDA to protect you. An NDA only does you any good if you have the wherewithal to sue them and keep paying lawyers until you win...and you won't likely win anything near the damages actually done to you before you run out of money to pay lawyers. Protect yourself with a breakup fee or by tell them you need them to agree to a minimum number (multiple) before disclosing any more information. You could be handing them your market segment if you give them too much information. 

Roman Tsukerman Go big or go home

December 12th, 2016

Demand equal disclosure on their business practices, market and potential. If they buy you out, they must retain some of your team and you need to know how you would fit into the new company's business. That way, you have info on their business that would mitigate a one-sided relationship where they learn about your strengths and weaknesses but you remain in the dark as to theirs.

David Rowell CEO & Founder at LifeLinker Inc

December 12th, 2016

Good comments prior to mine, so I'll try and pick another part of your explanation to focus on.

You said "We are not looking to sell".

Isn't that the end of this story?  Why don't you just tell them that and then get on with your lives?  Are you looking to sell or not?

If you are curious about the chance of receiving a possibly huge offer that might cause you to change your mind and agree to sell, then it would seem appropriate for the interested purchaser to name their price up front, subject to confirming certain business parameters.  Sure, such an agreement would probably have so many 'subject to' issues as to be almost worthless, but it would at least cause the other side to start revealing some of their valuation parameters, and you can decide, based on knowing the reality of the numbers they wish to find, whether the offer would be likely to proceed or not.

If you're not needing or wanting to sell, but, like all of us, always open to ridiculously over-the-top generous offers, you can afford to risk ending the negotiation at an early stage.  And if they are wanting to purchase, rather than just wanting to have a sneak peek at your internals, they'll come back in some form to continue the dialog.

Roger Royse Royse Law Firm

December 14th, 2016

It doesn't have to be that complicated. Start with a disclosure of financials on which they can base an offer. If you get letter on intent, you can then disclose CI. At least in California, a non binding LOI will obligate the buyer to negotiate in good faith ((unless they draft around it, which is possible) so you can take some comfort in that. BTW, the idea of a deposit is not so crazy. I am seeing that more and more with Asian buyers who are notorious for not closing and it is not so unlike the old breakup fees that used to be demanded. Finally, you should probably shop the deal before signing anything. It's possible that this one party is the best offer, but is that really likely?

Bob Graham Engineering and Software

December 12th, 2016

Why not take the exact message you just posted in this group and send it to them? Those are all reasonable, fair concerns and if they are coming to you, they should be proposing those solutions. If they can't handle transparency and difficult chats, then I don't think they are someone you should do business with.

I would just call them and tell them and see where they are at. If you are worried they will leave and kill the deal if you say this stuff to them, don't be. If they really want to buy you, they will answer your questions. If they are just trolling for information, it will upset them and they'll leave. 

Roger Wu co-founder at cooperatize, native advertising platform

December 12th, 2016

There is something called a "breakup fee" depending on where you are in your talks which is similar to the non-refundable deposit.

Charles Blanton Founder at Legends Media

December 12th, 2016

Sounds like you're looking for a breakup fee. If they've made an offer, and for some reason the deal doesn't go through, the breakup fee will ensure you and your team compensation for your efforts. Your M&A attorney will be able to share a great deal more. Sent from my iPhone

Ian Shearer Executive Chairman at Parakeetplay

December 12th, 2016

Nikola. You can demand whatever you like. If I was advising you I would probably advise doing something along the lines you are suggesting. Its sensible.
Also I would not reveal any critically sensitive information without agreement on price. I have advised many times on situations like yours and its pretty easy for an experienced adviser to work out whether your potential competitor is serious or fishing. I could tell by the questions they ask and their responses to my points.
So i guess my advice is to get a good M&A adviser who has handled this sort of situation before. Dont try to do it on your own.