Headlines on business pages locally and nationally reflect the favorable environment for hostile and negotiated buyouts of publicly-held companies. Various factors mean strategic buyers, private equity funds, hedge funds and takeover specialists are well-positioned to pursue buyouts. Those factors include equity prices that are still below historical highs, needs to grow and some loosening of credit.
Many of the same forces will likely also drive buyout opportunities among privately-held companies, including unsolicited overtures.
As a result, owners should have a game plan to effectively handle buyout overtures that may surface.
The following are some introductory points business owners should keep in mind to prepare for and respond to buyout overtures:
Understand the rules
Depending on how a company is structured, there can be a variety of rules that apply to buyout offers and how they might unfold. Likewise, it’s important to understand who has a voice in the sale of the company.
For example, a corporation may have a voting trust so that its trustees, rather than shareholders, elect board members. A company may have a shareholders or operating agreement that prescribes special rules for buyouts. Or a company may be family-owned, but outside trustees for family member trusts may control stock and may have some power over a potential sale.
Ownership groups need to communicate expectations to each other. Plans of a 58-year-old CEO who expects to sell the company by age 65 may not coincide with the objectives and timeframes of other owners. Plans and expectations of all owners need to be understood.
Additionally, owners should tap the expertise of key advisors to help on matters such as timing of a potential sale, estimating the business’ value, exploring alternatives to selling and developing succession plans. Such expertise may be available through board members. However, owners should make it a point to have trusted contacts – a banker and attorney among them – outside of the board who can share perspectives on these issues.
Have a plan in place
All businesses should have a protocol on how to handle buyout overtures. The protocol should identify how senior managers and board members should react to such overtures and who has authority to provide a substantive response. Also consider how to respond to rumors.
From a legal perspective, a CEO who receives a buyout overture is generally not obligated to inform owners or a board unless the CEO has received other instructions.
Additionally, while someone outside a company has no right to a list of company shareholders, an actual shareholder could stir the pot by suggesting to other shareholders that the company should be sold, undercutting leadership and compromising the company’s strategic direction. Good planning for responding to overtures as well as open lines of communication regarding the company’s direction can mitigate such conflicts.
It’s OK to explore
While ownership may not be ready to sell immediately, it’s a good idea to think about a potential sale on occasion if it is possible to stay discreet. Take advantage of investment bankers, private equity firms and strategic buyers who may express an interest in acquiring or helping you sell your business. While not leading them on, tap their expertise on the selling process and how they value your company.