If you own a successful technology services business, chances are you’ve been approached by a potential buyer. Maybe it’s a private equity firm, a strategic acquirer, or a competitor who has been watching your company for years.
The buyer tells you they’re very interested in acquiring your business. They understand your industry, like what you’ve built, and are prepared to make an attractive offer. Better yet, you won’t have to spend months talking to other buyers or going through a formal M&A process.
Sounds pretty good, doesn’t it?
If you’ve received an unsolicited offer to buy your business, you may be looking at what’s known in M&A as a preemptive offer. And while that offer may be attractive, accepting it without understanding what your business could command in the broader market can be an expensive decision.
I’ve seen it firsthand.
What Is a Preemptive Offer in M&A?
A preemptive offer is an acquisition offer made by a potential buyer before a business has gone through a formal, competitive sale process. The buyer’s objective is typically to secure the acquisition before other interested parties have an opportunity to submit competing offers.
Sometimes the buyer approaches an owner who hasn’t even considered selling. Other times, the owner is preparing to take the business to market, and an interested buyer attempts to get ahead of the process by presenting an offer directly.
These offers can be particularly attractive because they promise a faster, simpler transaction. The buyer may suggest that the owner can avoid the expense of hiring an M&A advisor, preparing marketing materials, and spending months meeting with prospective acquirers.
Frequently, there’s also an element of urgency. The buyer may give the owner only a week or two to accept, suggesting that the offer will disappear if the business is marketed to other buyers.
But here’s what sellers need to understand: A preemptive offer is designed to eliminate competition, and eliminating competition generally benefits the buyer more than the seller.
That doesn’t necessarily mean the offer is bad. It simply means the seller has no reliable way of knowing whether it’s the best offer available without evaluating other alternatives.
A Signed LOI That Was Worth Another $1 Million
A few years ago, I was introduced to the owners of a small managed services provider (MSP) who had already received an offer to sell their business. In fact, they had gone one step further and signed a Letter of Intent (LOI) with the buyer.
It was the only offer they had received, and they had not engaged an M&A advisor to evaluate the transaction. Fortunately, someone suggested they bring me in to take an independent look at the deal.
After reviewing their financial statements and calculating what I believed was their properly normalized adjusted EBITDA, I had some news for them.
The offer was too low.
Their immediate response was understandable. They had already signed the LOI and believed they were committed to the agreed-upon purchase price.
I explained that while an LOI establishes the framework for a transaction, the purchase price is not necessarily set in stone. Depending on the terms, there may still be an opportunity to renegotiate or even walk away from the transaction, although certain provisions of the LOI may be binding.
I contacted the buyer, explained that I had reviewed the financials, and presented my calculation of adjusted EBITDA.
The result? We negotiated an additional $1 million for the sellers.
We didn’t contact another buyer. We didn’t launch a competitive process. We simply brought an experienced M&A advisor into the conversation who understood how to evaluate the company’s earnings and negotiate its value. And it took less than a week to get the new LOI signed.
Imagine what might have happened if those owners had never sought a second opinion.
Two Preemptive Offers, and Nearly $5 Million Left on the Table
More recently, I was introduced to another technology services company that had received two preemptive offers.
Both buyers were aware that another party was interested, and I believe they even knew each other’s identities. The owners felt they had two credible buyers and were considering moving forward with one of them.
Once again, someone familiar with the situation encouraged the owners to contact RoseBiz before making a decision.
Rather than limit the process to those two buyers, we recommended taking the business to market. We identified additional potential acquirers, introduced the opportunity, and created a competitive environment.
Interestingly, after going through that process, the two original buyers were still the leading candidates.
But something important had changed.
Their offers had increased by more than $4 million, approaching $5 million above where they had started.
The business hadn’t suddenly become more profitable. Its customers hadn’t changed. We hadn’t uncovered some extraordinary new source of revenue.
What changed was the negotiating environment.
The buyers now understood that they had to compete for the opportunity, and the sellers had a much better understanding of what their business was worth to the market.
That transaction is currently under LOI, so I won’t share additional details. But the lesson is already clear: even when the original buyer turns out to be the right buyer, that doesn’t mean the original offer was the right price.
Why Do Buyers Make Preemptive Offers?
Put yourself in the buyer’s position for a moment.
You’ve identified an attractive MSP, MSSP, VAR, or other technology services company that fits your acquisition strategy. You know the business could generate significant value within your organization, and you would love to acquire it.
Would you rather negotiate directly with the owner, knowing you’re the only buyer at the table? Or would you prefer to compete against five or ten other qualified buyers who also recognize the opportunity?
I think we know the answer.
Buyers understand that competition can drive up valuations. A preemptive offer gives them an opportunity to acquire a desirable business before that competition develops.
Frequently, the buyer will also introduce a sense of urgency. The offer may be available for only a week or two, with the suggestion that the opportunity will disappear if the seller decides to explore the market.
That deadline can be particularly persuasive to an owner who has never sold a business before. (Actually, that’s exactly what happened to me on my second company sale… the buyer said they would pull the offer if I didn’t decide within the week.)
After all, why risk losing a good offer in pursuit of something better?
But here’s the question I would ask: If the buyer truly believes its offer is the highest anyone would pay, why should it be concerned about competing against other buyers?
A strong buyer with a compelling offer should be able to hold its own in a competitive process. Let me say that again…. A strong buyer with a compelling offer should be able to hold its own in a competitive process.
The Difference Between What a Buyer Can Pay and What a Buyer Will Pay
This is one of the most important concepts for business owners to understand and one I learned the hard way.
A strategic acquirer may see tremendous value in your company. Perhaps your VAR or MSP gives them an immediate presence in a new geographic market, expands their technical capabilities, or provides access to a customer base they have been trying to penetrate.
That buyer may have the financial capacity to pay a substantial premium for your business.
But having the capacity to pay and being willing to pay are two very different things.
A buyer isn’t necessarily going to volunteer to share all the financial benefits it expects to realize from an acquisition. Its objective is to acquire your company at a price that produces an attractive return on its investment.
Your objective (or should I say mine) is to maximize the value you receive while negotiating terms that protect your interests.
A competitive process helps bridge that gap.
When multiple qualified buyers recognize the value of an acquisition, they must decide how much of that potential value they’re willing to share with the seller to win the transaction.
And that can translate into millions of additional dollars.
Price Isn’t the Only Thing That Matters
There’s another important consideration when evaluating a preemptive offer: the headline purchase price is only one component of a transaction.
Two buyers may offer the same enterprise value but propose very different structures.
One may offer substantially more cash at closing, while another requires an earnout tied to future performance. One may require significant equity rollover, while another offers a cleaner exit. Working capital requirements, escrow provisions, indemnification obligations, and employment agreements can also materially affect what the seller ultimately receives.
I’ve seen situations where an offer with a higher stated purchase price was actually less attractive once we evaluated the structure and terms. This is another reason I encourage sellers to compare alternatives rather than focus exclusively on the initial dollar amount.
The objective isn’t simply to obtain the highest offer. It’s to negotiate the best overall transaction.
Should You Ever Accept a Preemptive Offer?
Absolutely. There are circumstances where a preemptive offer may be so compelling that it makes sense to move forward without conducting a full market process.
Perhaps the buyer offers a significant premium to a well-supported valuation, proposes exceptionally favorable terms, and has demonstrated the financial capacity to close. Or perhaps the seller has personal or business reasons for prioritizing speed and certainty.
Every situation is different.
But in my experience, those circumstances are the exception rather than the rule.
Before accepting a preemptive offer, I would want to understand how the price compares to a realistic market valuation, how the proposed structure affects the seller’s actual proceeds, and whether other logical buyers could create even greater value through an acquisition.
Most importantly, I would want the seller to make an informed decision rather than one driven by an artificial deadline.
Why Having an M&A Advisor Changes the Conversation
There’s something else I’ve observed over the years that business owners should understand. When a buyer knows you’re represented by an experienced M&A advisor, particularly one they’ve worked with before, they know they can’t simply throw out a lowball offer and expect it to be taken seriously. I’ve personally seen private equity firms approach unrepresented sellers with offers well below what I believed their businesses were worth. Then, almost magically, when an M&A advisor becomes involved, the offer increases. Same company. Same financial performance. Same buyer. The only thing that changed was the seller now had professional representation.
Why does this happen? Because buyers know an experienced M&A advisor understands market valuations, knows what comparable companies are selling for, and has relationships with other potential acquirers. They also know that presenting an unreasonable offer to an advisor they’ve worked with before can damage their credibility. When a buyer approaches an unrepresented owner, they may assume that owner doesn’t understand the current M&A market and may be willing to accept a below-market valuation. Simply having an M&A advisor at the table can change that assumption, and sometimes, the offer itself.
Don’t Confuse an Offer With Market Value
Selling your business may be the largest financial transaction of your lifetime. You’ve spent years, perhaps decades, building something valuable, and you may only have one opportunity to realize that value.
In the two situations I’ve described, bringing in an M&A advisor resulted in substantially better offers. In the first, we negotiated another $1 million without contacting another buyer. In the second, a competitive process increased the offers by nearly $5 million, even though the original buyers remained the leading candidates.
That’s a meaningful difference in what those owners could take away from their businesses.
If you’ve received an unsolicited offer, congratulations. It means someone recognizes the value of what you’ve built.
But before you sign an LOI, consider getting an independent assessment of the offer and what your business might command in a competitive sale process.
A preemptive offer may be a good starting point. Just don’t assume it’s the finish line.
The Hidden Cost of LOI Exclusivity When Selling Your Business