Navigating the 2021 tsunami of unsolicited M&A inquiries
Morrissey Goodale provides best practices for CEOs when approached about selling their A/E or environmental firm.
If you’re the CEO of an A/E or environmental firm, you’re likely to get at least one unsolicited overture a month about selling your firm. (If you’re in Florida, Arizona, California, or the Carolinas; or if you specialize in transportation or water infrastructure engineering; or you design data centers or laboratories; the frequency is once a week; if you’re in Texas you’re getting contacted daily.) Chances are you disregard those messages because you’re too busy, or you are concerned that if you engage with one, it may open a Pandora’s box. But if you have a Board of Directors and multiple shareholders, you just might want (and be required) to take another approach. Here’s why and how:
Fiduciary responsibilities: Depending on your firm’s specific situation, as CEO you may have a fiduciary responsibility to report specific types of inquiries to your Board and/or shareholders. I’ve found that many CEOs are unaware of these requirements, and they can come back to bite them down the road in the form of minority shareholder suits and disputes. Don’t let yourself be put in that position. Best practices are to get fully acquainted with your legal responsibilities as the top executive and then establish some working business guidelines to allow you to manage the flood of overtures.
All unsolicited inquiries are not created equal: They range from (a) sketchy at best—the out-of-the-blue email from an unknown broker or middleman who claims to be representing a “confidential [read anonymous] buyer” who is “extremely interested” in your firm based on “extensive research” to (b) compelling—a phone call from the CEO of an ENR Top 100 firm stating, “You’re the firm that we want and this is why.” You’re busy with regular CEO stuff. You can’t (and shouldn’t) give all of these inquiries equal weight. If you did, you wouldn’t get anything else done. But you need to know which ones you should present to your Board for discussion and which ones you can toss in the circular file.
Don’t respond to anonymous inquiries: In general, inquiries involving anonymity are not worth your time. Real buyers in 2021 recognize that this is a sellers’ market and will identify themselves up front—either when they reach out to you directly or through an intermediary. Any other approach should be noted and filed with no need for a response.
Not-so-smooth operators: Many unsolicited inquiries come from regional or business unit leaders or folks with the title “Vice President” or the even more impressive “Senior Vice President.” These approaches have high potential for wasting your time and a really low potential for going anywhere meaningful. In most cases, these individuals are not authorized to make an M&A approach and carry no M&A decision-making clout. They claim their firm is interested in buying your firm, but instead, their real intent is to team with your firm to improve the performance of their individual profit center. Essentially this approach is a cover for “Why buy the cow when I can get the milk for free?” Don’t waste your time with these unless you do want to team with them. The appropriate response here is “Have your CEO or Director of Corporate Development [person responsible for M&A] contact me directly for any discussions of a corporate matter.” When it comes to M&A, you should be engaging with these two functions. Everyone else is a passenger at best.
The Real Deal: The inquiries that deserve your attention are those that name the firm and that come from either the CEO, Director of Corporate Development, or their intermediary. These require a more thoughtful response—one that balances (a) the needs of your Board and shareholders with (b) your role as CEO, and (c) your firm’s brand in the industry.
What does your Board want? How you handle these more meaningful inquiries depends on the position of your Board with respect to a firm sale. Would the Board consider a sale of the firm? If yes, then under what conditions? Knowing the answers to these questions provides you with the guidance you need to manage your time, while meeting your fiduciary responsibilities and advancing your business agenda.
First line of defense: Many Boards address these questions by establishing a strike price along with a minimum set of terms. Essentially this says, “We would consider selling the firm for a minimum price of X dollars with the following conditions.” These conditions typically include a preferred transaction structure (stock vs. asset), amount of cash at closing, zero earn-out provisions, and/or a certain timeframe for the transaction to close. Importantly, they include a premium price and favorable terms that recognize (a) the firm is not actively seeking a sale and (b) the recipient of the terms needs to “pay” to get this exclusive “swim lane” to deal with your firm directly without any competition.
Opening move: Armed with your strike price and minimum terms, you’re equipped to have an opening conversation with potential buyers. I like to recommend taking an initial “get to know you” meeting or call to hear “the pitch” from the suitor. Don’t share anything proprietary, just learn. Recognize that they are approaching you, so they have to put the work in to impress; it’s your job to listen, assess, and report back to the Board.
Sort the wheat from the chaff: If you and your Board think that selling to the suitor could be good for the shareholders, then provide the strike price and minimum terms. It’s at this point you will see who is a pretender (likely 99%) and who is real. Most suitors will balk at your minimum terms—some may even take offense at your position. That’s OK. That’s the indication that they were never going to be your buyer and instead that they were going to waste your time.
Why is this approach important? The greatest risks to you when you enter M&A discussions are that you will (a) waste valuable, irreplaceable time and (b) share proprietary information with a suitor that is either a tire-kicker or a low-baller (or both). It’s hard to identify those risks if you are not experienced at selling your firm. And most CEOs are not experienced in selling their firm. Most do it once and once only. They assume that if they are dealing with a firm that has a great reputation in the industry—for client service and technical capabilities—then that reputation will extend to their dealmaking acumen. Most of the time that is a poor assumption. Indeed, many A/E firms that have a great industry brand are lousy or inept dealmakers. It’s just not their core competency. You do not want them to learn how to be a better dealmaker at your expense. Setting the terms up front allows you to manage those risks. It allows you to politely stiff-arm the time wasters.