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by Barrie Pearson - Wednesday, 29th August 2007

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I once helped the owners of a printing company to put a value on their business. Our figure of £6m to £7m confirmed what they had in mind.

Almost immediately afterwards, and before appointing us to advise them on the sale, they received an unsolicited approach from a private company which quickly resulted in a "£10m offer."

The owners decided it would be a waste of money to pay for any corporate finance advice, because the deal was in the bag.

I said it wasn't and strongly recommended that they obtain an outline written offer straight away. Our concern? The approach was from another private company, which was planning a stock market listing within 18 months, and we could not see how they could raise the finance required on sufficiently attractive terms.

But by now the vendors had been well and truly seduced. The managing director had been offered a main board directorship when the business was listed on the stock market. This really was an ego trip.

They were talked into spending considerable time during the next four months working out a detailed integration plan for the two businesses.

When the offer was finally put in writing, it was to buy the business for only £2m in cash, and £3m in unquoted shares in the acquirer. The remaining £5m was entirely contingent upon the combined group meeting demanding profit targets, and was to be paid entirely in shares.

Not surprisingly, the vendors knew they had wasted considerable management time and delayed the sale of their business.

That was bad. But I have heard worse.

There was the private company that received an unsolicited offer from the managing director of the UK subsidiary of a worldwide group, which just happened to be its head-on competitor in the UK.

In conversation, the offer made was between £15m and £20m payable in cash. The owners were convinced they had found a sucker, because they believed their business was worth less than £10m.

The alarm bells should have started ringing, but instead they were persuaded to allow a team of executives from the acquiring company to spend several weeks in their business to develop a detailed integration plan to confirm the exact value of their offer.

Basically, they suffered information rape.

The final offer from the competitor was for £3.9m. When the owners asked the head office in Chicago to justify such a low offer, they were told that the head office was totally unaware that an unauthorised offer had been made to them.

And the moral of the story?

When someone makes an unsolicited offer for your business, talk is not merely cheap - it's free. Always ask the person to outline their offer in writing at the earliest opportunity.

This will require them to get approval at the highest level, before you give away any commercially sensitive information or waste valuable management time on a deal which may well be destined never to happen.

The profit forecast for the current year is a key factor in determining what a buyer will pay for your business.

You would be a mug to make an optimistic profit forecast, in the mistaken belief that the new owners would only discover the truth when it was too late because legal completion will take place before the end of the financial year. Not so!

The due diligence carried out by the prospective purchaser before legal completion will focus on the achievability of the current year profit forecast. If they discover the forecast is over-optimistic, or you are obliged to reduce your profit forecast at any stage, you must assume the buyer will renegotiate the deal at a price significantly lower than the reduced profit forecast might suggest.

The worst case I have encountered was a vendor who attempted to cover up falling profits by a flagrant change of accounting policy during the financial year. He did not even tell us, as his corporate finance advisers, but inevitably it was found out during due diligence. The prospective purchaser pulled out immediately.

So make sure any profit forecast you give to a prospective purchaser will be achieved. On the other hand, don't be so conservative that you undervalue the business!

Don't be naive enough to think that the value of your business is what a purchaser will pay for it. It should be the highest figure from several serious buyers.

I like to assemble a shortlist of known serious buyers from around the world. If we receive four outline written offers, there is every likelihood that the highest offer will be at least 50 per cent more than the lowest; often it's much more. The message is clear: competitive bids deliver the highest price for any business.

First published in May 1997. Barrie's words of advice are still every bit as true.

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