About 70% of the selling private tech firms we work with at Corum have been approached, often unsolicited, sometimes with signed offer in hand. Courtship is exciting, and the instinct to make the offer happen is strong. But then questions start to emerge. Is this the right time to sell? The right buyer? Is this the right price? Can we make it through due diligence without hurting the company? Would someone else pay more?
What we have learned over the last 27 years of selling more tech companies than anyone in the world is that 75% of the time there is someone else willing to pay more. Further, if you do a global search to calibrate this first offer, your final value will end up being, on average, 48% higher, even if it is with that first bidder. So, dealing with one buyer is definitely not the path you want to take to get the value you deserve.
While these stats seem intuitively obvious, many CEOs still try to drive this one buyer overture to conclusion, ignoring the biggest question of all: personal liability. What is their fiduciary responsibility? What are the consequences if they sell to the first party that comes along without getting competing offers?
The consequences can be personal bankruptcy.
In this day and age, with all of the shenanigans of public CEOs during the dot-com crash, and the recent recession caused by irresponsible actions in the financial community, there are a number of laws that have been passed by Congress, as well as strengthening of minority shareholder rights in nearly all states and foreign countries.
Simply stated, if you do not calibrate the value of the firm and sell to the first interested party rather than approaching multiple potential acquirers, you can be liable to other shareholders and stakeholders who may claim that you acted irresponsibly in not getting a higher value. This is essentially the “fairness opinion” argument that plagues public companies in mergers. The same logic applies to private firms now, especially where there are multiple stock and debt holders. In the end, courts have ruled that the selling CEO can be liable to make up the difference to shareholders if they didn’t calibrate value and sold too low to the first bidder.
So, when a buyer approaches you, and assuming they are not just “bottom fishing” (most often the case), think first of yourself in these proceedings – your own liability. Whatever you do, be sure there is a good NDA in place as well as non-solicitation agreement. And never sign an exclusive negotiating agreement locking out discussions with other parties. Too many buyers will try to force you to do this, and it is a huge mistake.
Look, this is likely the most important transaction of your life, so do it right. In our upcoming Tech M&A Monthly on December 12, we will be discussing the Six Steps Every Tech CEO Should Take When Approached by a Buyer. With so many buyers making acquisition overtures these days, you won’t want to miss this webcast.