Navigating Unsolicited M&A Offers: A Seller’s Guide to Retaining Leverage

It happens more often than most owners expect. A private equity firm, strategic acquirer, family office, or

independent sponsor calls directly about buying the company. The conversations go well, the buyer is

credible, they clearly understand the business, and the number they float is a real number. At that point the owner has a buyer in hand with an offer amount they’ve dreamed of. Why not move forward?

That's a fair question, and the honest answer is that finding the buyer is just one part of this process an

unsolicited offer solves. Everything else sits exactly where it was. You still have to determine what the

company is worth, evaluate whether this buyer can close, negotiate the structure, defend your earnings against someone else's accountants, manage diligence while running the business, hold your leverage as it drains away, and get from an attractive headline number to money in your account. Nearly all of that happens after the offer, and nearly all of it is where the dollars actually move.

What the Offer Tells You, and What It Doesn't

An unsolicited offer can be a large number in absolute terms and still sit below what the market would pay.

Owners know their businesses better than anyone, including their customers, their competitors, their people, and their industry. There is no reason they should truly know how private equity firms and strategic acquirers are pricing companies like theirs this quarter, which is a different body of knowledge entirely and one that changes with credit markets and buyer appetite.

Before you negotiate against a number, get an independent read on value. A credible one goes well past applying an industry multiple to last year's EBITDA. It should account for normalized earnings, growth, margin direction, revenue quality and recurrence, customer concentration, management depth, capital intensity, actual comparable transactions, and who is buying in your space right now. If a buyer offers $20 million, that may be an excellent price. Certainly, it is an excellent price for the buyer, as they’re the one with the unsolicited offer in your direction. Without a frame of reference, you have no true idea of its true strength.

The First Buyer Isn't Necessarily the Best Buyer

There's a second problem with an unsolicited approach that's easy to miss: you have effectively run a sale process with one bidder. You may like this buyer. They may treat you well, understand the company, and hold exactly the operating philosophy you hoped to find. What you don't have is any idea what anyone else would have done, because nobody else was asked.

Different buyers look at the same business and see different things. A private equity firm hunting a platform may pay for your management team and infrastructure because it intends to acquire three more companies around you. A PE-backed strategic looking for a bolt-on may have cost or revenue synergies that support a number a financial buyer can't justify. A strategic acquirer may be buying your customers, your geography, your technicians, or your distribution, none of which shows up cleanly in your standalone financials. A family office may have a longer horizon, lower return hurdle, and a very different attitude toward leverage and your continued involvement. An independent sponsor may put the most attractive number on the page and still need to raise the equity after the LOI is signed, which is a different animal entirely when it comes to certainty of closing.

The highest headline number is not automatically the best deal, either. Cash at closing, certainty of financing, rollover requirements, employment terms, and whether you can stand these people in year two all matter.

Competition doesn't just establish price. It establishes alternatives, and alternatives are the only real leverage a seller has. Without them it's difficult to know whether you picked the best buyer or simply liked the only one you met.

Decide What You Want the Day After Closing to Look Like

Before you negotiate price, decide what you want your life to look like when this is over. Some owners want to hand over the keys and be gone in ninety days. Others want three to five more years running the company with someone else's balance sheet behind them. Some want meaningful rollover equity and a second bite when the buyer sells. Others want to convert everything to cash and never sit through another board meeting. Those are all reasonable answers, and they point toward completely different buyers.

If you're staying, get specific about what staying means, because an owner who has made every meaningful decision for twenty-five years tends to discover that "staying on as CEO" feels different when someone else owns the equity. Who approves the budget? Who hires and fires? Who sets compensation? What happens when you and the board disagree about strategy? Can you be terminated, and what happens to your rollover shares if you are? Are you expected to hit an earnout while the buyer controls the spending, the pricing, and the headcount that determine whether you hit it? These get defined either before you're committed or as an afterthought once you are, and the first version goes much better than the second.

Price and Consideration Are Two Different Conversations

A $20 million offer does not mean $20 million at closing. The consideration may include cash, rollover equity, a seller-note, an earnout, escrows, holdbacks, and other contingent pieces, and in deals negotiated directly between a buyer and an owner, earnouts and seller paper show up constantly because they're the easiest way to bridge a valuation or financing gap. Neither one is inappropriate and both can make sense but understand what they do: they move risk from the buyer to you.

A dollar wired at closing and a dollar that might arrive in three years if certain conditions are met are not the same dollar, and they shouldn't be added together on the same line. If there's an earnout, know precisely how it's calculated, who runs the business during the measurement period, and what protects you if the buyer changes pricing, staffing, marketing, or capital spending in ways that happen to make the target harder to reach. If you're providing seller financing, be clear that you are lending money to the person who now owns your company and taking that credit risk with your own proceeds. The headline price matters. How and when you get paid matters just as much, and it gets far less attention.

What to Settle Before You Sign the LOI

The letter of intent is mostly nonbinding, which leads owners to treat it as a formality. It isn't. In almost every case it grants exclusivity, which takes your company off the market and hands the buyer the one thing it wants most, and it sets economic and structural terms that are difficult to reopen later.

Before you sign one:

• Get an independent valuation of the business, based on normalized EBITDA, real comparable transactions, current market conditions, and the specific characteristics of your company rather than a rule of thumb

• Know whether the offer is competitive, since an attractive number and a market-clearing number are not necessarily the same number

• Understand why this buyer wants your company. Whatever makes you unusually valuable to them and how you fit with their growth objectives is where your leverage lives

• Understand the buyer's history. What have they bought, did those deals close on the original terms, and what happened to the owners and management teams afterward

• Get educated on how the transaction is funded. "We have the money" is not the same as committed equity and committed debt. Find out what still must happen before this buyer can close

• Determine what you receive at closing, and separate that figure from rollover, seller notes, escrows, holdbacks, earnouts, and every other deferred or contingent piece

• Understand the earnout before you agree to it, including what must happen, who controls whether it happens, and what protects you if the buyer runs the business differently than you would

• Define your role after closing, including how long you're expected to stay, what authority you hold, who you report to, how you're paid, and what happens if either side wants out early

• Be clear on your rollover equity. What entity do you own a piece of, where does it sit in the capital structure, what rights come with it, how can you be diluted, and what happens to it if your employment ends

• Agree on how EBITDA is being calculated, and identify every adjustment and add-back the buyer relied on when it set the price

• Document add-backs before diligence starts. At a 6x multiple, every dollar of legitimate EBITDA you concede unnecessarily costs six dollars of enterprise value

• Discuss working capital before you grant exclusivity, including methodology, measurement period, and the expected target, rather than discovering in week nine that you and the buyer had very different assumptions

• Identify the likely debt-like items, so you know what the buyer may try to deduct from enterprise value before that conversation starts

• Keep the exclusivity period as short as the buyer can live with. A buyer needs enough time to do real work, but a long exclusivity period gives away leverage and gets you nothing in return

• Understand what lets the buyer walk. Financing contingencies, diligence conditions, and material adverse change language can make an offer far less firm than it reads

• Bring in experienced M&A counsel now, not when the purchase agreement arrives, because the LOI sets terms your attorney will otherwise be trying to renegotiate from a weaker position

• Decide your walk-away points, while walking away is still emotionally possible, which is to say before six months of fees, diligence, and anticipation have accumulated

No LOI resolves every one of these. The point is narrower than that: once you grant exclusivity, some of your ability to resolve them leaves with it.

Signing the LOI Moves the Leverage

Signing feels like progress, and it is. It also changes the negotiating posture in a way most first-time sellers don't anticipate. Before the LOI, the buyer is competing for the chance to own your company. After it, you've agreed not to speak with anyone else, the buyer has your financials, contracts, customer detail, employee data, and tax history, and the buyer knows one more thing that never appears in the documents: you have started picturing this deal closing.

Exclusivity is legitimate and is a non-starter in almost all deals. A buyer about to spend real money on accountants and attorneys needs to know the seller isn't shopping the same information across town. Just understand what you traded for it, which is the option to say no and mean it.

The Quality of Earnings Report Is a Second Valuation Negotiation

Suppose the LOI prices the company at 6x $3 million of adjusted EBITDA, so enterprise value is $18 million. During QoE, the buyer's accountants challenge $400,000 of adjustments. Maybe they question excess owner compensation, family payroll, a one-time legal matter, personal expenses running through the company, a discontinued initiative, or unusual professional fees. It looks like an accounting exercise, and it's presented like one, but at 6x that $400,000 is $2.4 million of purchase price. This is the single largest unforced error I see sellers make on their own, because the conversation feels technical and the numbers feel small.

Don't accept haircuts to defensible add-backs simply because a national accounting firm put them in a schedule. Make them support the challenge, produce the documentation, explain the circumstances, and push back where you're right. Some of your adjustments won't survive, and they shouldn't. But the buyer's QoE provider is advising its client, not you, and nobody in that room is being paid to find reasons your earnings are higher than presented.

Diligence Questions Are Rarely Just Questions

Diligence exists to verify what the buyer relied on and to surface risk before closing, and that's a legitimate exercise. It also generates the raw material for the next round of negotiation. A question about customer concentration can turn into a valuation discussion. A question about accrued bonuses can turn into a debtlike item. A revenue recognition question can turn into an EBITDA adjustment, an inventory question can turn into a working capital dispute, and a conversation about deferred maintenance can become an argument about future cash flow. Answer everything accurately and completely, and at the same time understand why each request was made and where the answer is likely to land.

Then there's the volume, which surprises even sophisticated owners. Financial statements, tax returns, bank statements, customer contracts, vendor agreements, employee census, insurance, leases, litigation, IP, corporate records, revenue detail by customer and period, payroll, capex schedules, working capital detail, regulatory matters, and then the follow-ups, and then the follow-ups to those. Someone has to run the data room, track requests, decide who provides what, review what goes out before it goes out, and keep the whole thing moving. Meanwhile the company still has to perform, because a soft quarter in the middle of diligence becomes its own negotiation. The owner's time is better spent running the business and making the handful of decisions that actually matter than confirming whether request 7.4.3 landed in the right folder.

Enterprise Value Is Not What Hits Your Account

Even after both sides agree on value, there's a second negotiation over how enterprise value converts into your proceeds, and working capital is usually where it starts. The buyer expects the business delivered with a normalized level of working capital, and setting that target involves the measurement period, seasonality, collection patterns, and what belongs in the calculation at all. Two parties can shake hands on $20 million and be a million apart on the peg.

Debt and debt-like items are the other half. Bank debt is obvious, and the rest is negotiation: accrued bonuses, deferred revenue, unpaid capex, customer deposits, capital leases, PTO balances, transaction expenses, and anything else the buyer decides looks like borrowed money. The buyer argues these reduce your proceeds dollar for dollar. You may see an ordinary operating liability that's already sitting in working capital. The gap between those two views can run into seven figures, which is why an agreed enterprise value and the number on the wire are often two different numbers.

A Retrade Doesn't Always Look Like a Retrade

Every seller recognizes the obvious version, where the buyer offered $20 million and now says $17 million. The economics move far more often without anyone touching the headline. The working capital target goes up, an add-back disappears, a liability gets reclassified as debt-like, the escrow grows, cash at closing becomes a seller note, part of the price becomes an earnout, the rollover requirement increases, or the indemnity terms get more aggressive. The $20 million stays right where it was on page one while the value, timing, and risk of what you actually receive changes materially.

Any single one of these can have a legitimate basis, and often does. The discipline is to keep comparing the deal you're negotiating this week against the deal you thought you agreed to when you signed the LOI, and to do that on paper rather than from memory.

Time Works for the Buyer

The longer the diligence process runs, the harder it becomes to walk away. Attorneys and accountants have been paid. Your team has spent hundreds of hours on diligence instead of on customers. Sensitive information is out the door. Employees may have figured it out, your family has certainly figured it out, and you've probably started mentally spending the proceeds and thinking about what comes next.

That's the moment a change gets proposed. It isn't big enough to blow up the deal, so you take it. Then another one arrives, and then a third, and eventually you hear yourself say the four most expensive words in this business, which are "we've come this far." Money already spent and time already invested tell you nothing about whether today's terms are acceptable. The only question that matters is whether you would sign the deal in front of you if it were handed to you fresh this morning.

Good Buyers Negotiate Hard

None of this suggests the buyer who called you is acting in bad faith. They may be excellent people and exactly the right home for your company, and you should want a capable, well-advised buyer across the table, because the alternative is a buyer who can't get to closing. Rigorous diligence and hard negotiation are what competent buyers do.

Just be clear about who is on which side. Their deal team is protecting their returns, their attorneys are protecting them in the purchase agreement, their accountants are examining your earnings, their lenders are protecting their capital, and their investment committee is pricing every risk in the file. Every one of those people has a job, and none of those jobs involves maximizing what you receive for your company. Liking the buyer and negotiating hard against the buyer are not in conflict, and the sophisticated ones understand that better than sellers do.

The Hard Part Starts After Someone Says "I'm Interested"

An unsolicited buyer eliminates one step. It doesn't eliminate the ten that come after it, and a professional buyer may close a dozen acquisitions this year while you sell a company once in your life. That asymmetry is the whole issue, and it isn't a matter of intelligence or sophistication. It's experience and reps.

There is nothing wrong with selling directly to someone who approaches you, and I've seen it work. If that's the path, at least don't be the only person on your side of the table. Get an independent view of value before you negotiate against a number, engage M&A counsel before the LOI rather than after, put someone on your side of the QoE who has defended add-backs before, and decide now, while you still hold some leverage, which terms you're actually willing to lose. The buyer will have five professionals in the room. Having one or two of your own is not an expense, it's the difference between negotiating and reacting.

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About the Author

Gregory Fefferman brings with him an impressive track record, boasting over 20 years of experience in the financial services industry. Throughout his career, he has proven himself as a trusted advisor to hundreds of successful business owners while also making a name for himself as a successful entrepreneur. After obtaining his MBA from Chicago Booth, he relocated to South Florida, where he made significant contributions to well-known financial institutions including DLJ, CSFB, and Citigroup. Notably, for the past decade, he honed his expertise in building, buying, and selling businesses independently.

Mr. Fefferman currently serves as a Southeast Director of M&A Services at Pacifica Advisors, focusing on lower middle market transactions.  His email address is gregory@pacificaadvisors.com.