Beware! How to screen a fake acquisition approach

Not all potential buyers are genuine. Tips to understand who might be fake, and how to handle their approach.

It's a normal working day. You're at your desk, trying to quickly crunch through your email backlog before a meeting with a team member.

Your phone rings, 'Unknown Number'. You're busy and you should ignore it – probably spam. For some reason you pick up. It's the CEO of the big boys in your industry, and they are really keen to meet. You ask why, he says they're "considering a transaction"...!

Then you start to get worried.

Are they actually serious? Or do they just want to steal our algorithm? Or understand how our tech works so they can copy it? Or do they just want to scope out our market before launching themselves? Would they really pay what we value the business at? Where will the information I share end up (they might be talking to your competitors too)?

Many owners get so excited about these approaches, only to feel crushed later when the deal falls away.

In hindsight, it was just a feeler and they were never keen. Or worse, you later see the press release for their copy cat product launch, or the deal to buy a competitor. Your flimsy NDA won't help you.

But maybe you're being paranoid. If you want their approach to progress, you are going to have to start sharing your secrets at some point. So how do you proceed?

In this article, we’ll break down:

1️⃣ the reasons why many approaches aren’t legitimate
2️⃣ ways to assess if it's legitimate
3️⃣ what questions to ask in the first meeting
4️⃣ how to move the conversation forward

Let's dive in!

1️⃣ Why some approaches aren’t legitimate

Let’s split these up into malicious and non-malicious reasons.

Malicious

The buyer isn’t ever serious about buying you, but is tactically using a fake acquisition approach to get some confidential information out of you.

We’ve flagged some these above. They want to know about some of your tech or other IP so they can copy it. Maybe they are planning to launch a similar or copy-cat product to yours, and are fishing for information about market size, pricing, sales and marketing strategies and so forth.

Or maybe they are quite far along with a competitor, and they are using you to get some validation on the assumptions in their model.

Sadly, this is surprisingly common.

Non-malicious

You have less to lose here. They are not trying to steal your IP or launch a competitor. But you can still end up wasting huge amounts of time on a buyer who won’t ever buy you. And it’s crushing to get your hopes up unnecessarily.

Here are some common examples:

  • They don’t have the financial means to complete a deal in the value range you expect. It's a non-starter.
  • M&A is sexy and cool to outsiders, and attracts a lot of pretenders. They've never done M&A before and don't understand the basics of valuation so won't pay you anywhere close to what you're worth. Nor do they understand the time, effort and transaction costs involved.
  • They are really early in the process and not ready to make the deal happen anytime soon. You might waste your time, educating them about the market when a deal won't happen for a long time.

An addendum on the final point: If the buyer is early in their search, and you're not in a rush to sell, you might be happy to spend some time with them to build a relationship. If they could (one day) be a great buyer with a nice strategic premium, you might see some ROI in this. Many deals happen where the buyer has known the company for some time before they make an offer.

2️⃣ How to assess an approach

How can you assess if an approach if worth spending your time pursuing, and if you should be confident sharing information?

Here are some questions you can ask yourself:

👉 Does a deal fit into the six strategies for M&A?

Look back to this article if you haven't seen it yet: The SIX strategies that drive M&A.

This explains that acquisitions happen to deliver one of six strategies. They are:

  • Buying out a competitor
  • Launching in an adjacent product
  • Entering a totally new market
  • Integrating the value chain
  • Financial only (like a rollup or PE buyer)
  • Buying some unique audience, IP or team.

If you do some research on the company and you can’t possibly see why they could want to buy you, that's a red flag.

👉 Are they big enough?

You want the company to be big enough to pay your ideal exit price.

If the company is going to have to significantly extend themselves, or borrow nearly all the purchase price, that's not ideal.

If they're publicly traded, check the market capitalisation. If you can find published financial statements, check these out.

You're looking lots of cash and equivalents on their balance sheet – then they have the means to pay. High profitability and fast growth are good signs too.

If you can't find that information, softer but useful proxies are number of employees on LinkedIn, impressive customer logos on their website, or an impressive management team – but don't place too much weight on these.

👉 Have they done deals in the past?

Companies that are experienced buyers are much better acquirers than first timers. It's also a good sign that the approach might be legitimate.

You should be able to find snippets of information online. Bonus points if there are many and they are recent, the deals are for values similar to bigger than your expectation (so its not their biggest deal ever), and the strategy of the deal matches with acquiring you.

👉 Have they done their research?

Like any cold outreach, it works best if its personalised and specific to the recipient. They should mention a few facts specific to your company to show they've done some research on you.

If not, they might have contacted 100s of people in a 'cast the net wide' approach, so you might be in for some time wasting.

👉 Do they have an advisor appointed? Or an M&A team in-house?

You should also be excited if the contact comes from their M&A / Corporate Development team, or from an M&A advisor that they've appointed.

You can also check on LinkedIn to see if they have M&A expertise in house. If you can see ex investment bankers in senior roles... bingo! They are serious about acquisitions.

👉 Is the approach from someone senior?

The more serious they are, the more senior your contact will be. M&A is obviously very expensive, complex and risky. Outreach to a key target is rarely trusted to a junior analyst.

If you are contacted by someone relatively junior, they might be serious but just casting their net wide to look for targets.

👉 Do they want to stay anonymous?

An approach from someone 'acting on behalf of an interested party' is not a good sign. They should be willing to share the name of their client very soon, and if not you should back away without sharing any sensitive and non-public information.

👉 Do they have a good / bad reputation?

Asking around in your network about their reputation can be helpful. You might not get anywhere with this, but it's worth asking if there are people you trust who know the company.

Some have a terrible reputation for stringing companies along, or for outright stealing IP, and you'll kick yourself if you never bothered to ask.

👉 Gut feel

This is least specific advice, but perhaps the most powerful. If you get a sense (either from the approach or in the first meeting) that someone isn't quite right, you should trust your gut.

3️⃣ What to ask in the first meeting

Unless you are seeing really strong red flags, the default should be to take a first meeting with the potential buyer.

Here's the challenge:

You want to start the relationship off on the right foot. Trust is key. M&A is a collaborative process, with two sides working together to get a deal done that works for both of you. There will be conflict, but you shouldn't see it as war.

You want to look open, transparent and helpful. But you need to protect yourself too.

So how to proceed?

If you have concerns, it's OK to call this out in the first meeting. You can say:

I hope you don't mind, but can I ask some questions up-front about why you've approached us? I've heard some horror stories of people getting false approached.

Then you can ask them some follow-up questions, which track to your areas of concern from the assessment above.

  • Why are you considering an acquisition in this space? This is innocuous, open question. They should be able to articulate their high-level strategy clearly, even if they don't go into specifics on their rationale for the deal at this stage.
  • How might you see us fitting into your organisation? They might not have all the answers here, but they should be able to give some ideas here.
  • Why did you reach out to us? This is a probe on how much research have they done on you specifically. Or do you just get a vague answer...
  • What deals have you done recently? What can you tell me about them?
  • Do you have a team in-house that handles acquisitions?
  • When would you like to get a deal done by? If they have a specific deadline, that's great.
  • Which other companies are you talking to? They might not tell you this, or they may be quite open. There's no harm in politely asking.

4️⃣ How to move forward

You then need to make a call on whether you want to start sharing information or just shut the conversation down there.

Ultimately, this is always a judgement call and you will need to trust your gut instinct. The questions above should help to hone that intuition and give you some evidence either way.

If you are still not be sure where it's going to go, start by answering questions with information that's already public, or not very sensitive to you.

Hold back the stuff that you'd hate for a competitor to know. That might be the secret sauce behind your product, KPI data like acquisition costs or conversion rates, or non-public financial information.

If they keep drilling into one particular area over and over again, that might be a sign that this information is all they're really after!

A note on NDAs

It's normal to sign an NDA (or Confidentiality Agreement) before sharing information. They prohibit both sides from sharing information with other parties, or using information for anything other than the deal.

A naive seller might think that by signing an NDA you are totally covered.

It's a lawyer in-joke that these are borderline pointless, at least in the UK. It's very difficult to sue someone under an NDA, unless they have been blatantly forwarding your documents and you have proof. And once the buyer has your data in their head, how do you stop them using it to set their own strategy...?

Sure, sign an NDA but use the practical tips in this article to protect yourself in a more practical way against a fake buyer.

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