After a fifty-year film collaboration with the James Bond franchise that started with Sean Connery piloting a DB5, Aston Martin pulled out all the stops and created a special model, the DB10, for the 2015 Bond movie, Spectre. At the time, rumors abounded in the car community that the DB10 would go into production as shown in the movie, but it was not to be. Aston Martin only built ten copies of the DB10, made from a stretched wheelbase Vantage and lots of custom sheet metal. Like most concept cars, though, elements of the DB10 design eventually showed up in Aston Martin’s next production car, the DB11.
As a rule, concept cars are marketing pieces as much as design studies, rendered to get attention and hold it until the production model (which may bear little resemblance to the concept) is available for purchase. In the case of the DB10, this method worked, as Aston Martin’s launch of the DB11 has been the marque’s most successful in history (“success” is relative; Aston Martin has sold fewer cars in its 104-year history than Toyota typically sells in two days).
When clients call us seeking advice after receiving an unsolicited offer for their RIA, the first questions they ask generally revolve around two issues:
- Is the price reasonable? and
- Do we think the buyer will be willing to improve the offer?
“Price” is a sticky wicket that we’ll cover in a later post, but whether or not the first offer is going to change in the negotiation and due diligence process is a certainty: yes. The only question is which direction (higher or lower) the offer will move before the transaction closes.
Universal Truths on Unsolicited Offers
If you receive an unsolicited offer for your investment management firm, you’ll find it is usually difficult to immediately assess the sincerity of the offer. And while making generalizations about the M&A process can be more misleading than helpful, we will assert the following:
- An unsolicited offer is made based on limited information. Often the initial overture is based on information beyond what is publicly available on the seller’s website and in regulatory filings. Even with financial statements in hand, prospective buyers making their offer know very little about the seller. The due diligence process involves the review of hundreds of pieces of documentation that can and will shape the purchase agreement.
- An unsolicited offer may be a competitive bid, but it is not a bid made in a competitive market. Not every sale is best conducted in an auction process, but the prospective buyer making an unsolicited offer knows that it is, at least for the moment, the only bidder. The object of an unsolicited offer is to get the seller’s attention and cause them to enter into negotiations, often giving the bidder an exclusive right to negotiate for a fixed amount of time.
- Whether the offer is made at the high end or the low end of a reasonable range depends on the bidder’s perception of the seller. If a buyer thinks a seller is desperate, the initial offer may be at the low end of a reasonable range, in which the selling process should evolve to move pricing and terms more favorable to the seller. In many cases, though, the initial offer is above what the buyer ultimately wants to pay (“bid it to get it”) and will use the due diligence process to beat the price down or insert terms that shift the burden of risk to the seller. If the initial offer seems too good to be true, consider the latter a distinct possibility.
- An LOI is NOT a purchase agreement. Many sellers think the deal is done if they receive an unsolicited offer with a strong price and favorable terms. We don’t want to suggest that buyers never put their best foot forward on the first round, but an unsolicited offer should be viewed more as an overture than a commitment.
- Once the offer is accepted, the real work begins. Stop and think for a moment about what you would like your employment arrangement to be post-transaction. Do you want a substantial base, incentive compensation, a multi-year arrangement, roll-over ownership, administrative responsibilities or just client-facing work, protections in the event of termination without cause, an internal or external reporting requirement, and/or other arrangements? Imagine your situation as viewed by the buyer and what they would want. This is just one item which is rarely delineated in detail on the first offer. A legion of issues must be resolved in the process of negotiating a final purchase agreement, which is why “deal fatigue” is a prevalent cause of abandoned transactions.
Bond’s DB10 wasn’t what it seemed to be. It wasn’t the prototype of a production car. It wasn’t equipped with Aston Martin’s most potent powertrain (what was Q thinking?). It wasn’t even built on a “DB” series chassis. It was a movie car, and ultimately a design exercise for Aston Martin to whet the public’s appetite for their next production release. That the concept was only a suggestion of the ultimate product is a reasonable metaphor for the relationship between an unsolicited offer and a closed transaction. The offer gets the process started, but it’s the process that creates the deal.
Transacting an investment management firm is complicated. Advisors to buyers and sellers have the delicate task of aggressively representing their clients and covering every bit of ground in the due diligence process without killing the deal by exhausting the buyer and seller and making them wonder why they ever started negotiations in the first place. The primary danger of an unsolicited offer is that it lures potential sellers into thinking the deal is done and the process will be easy. As with most things in life, if something looks too good to be true, it usually is.