Dealing With Unsolicited Offers to Acquire Your Oilfield Business

Oilfield Industry Newsletter, August 2014

We’re often called by oilfield business owners who get blindsided by an unsolicited offer to acquire their business. Most haven’t given serious thought to selling their business, but the number thrown at them made them stop and think.

In this report we provide you with some insight as to why these unsolicited offers are on the rise, how to handle them, and some common mistakes to avoid.

Why? Because rugged is the new sexy.

The oilfield industry has become extremely attractive to private equity firms and large corporations due to the recent growth explosion. Today there are over 40 companies actively chasing deals in the oilfield, many backed by private equity money. These companies are rolling out the red carpet and reaching out to successful business owners like you, and they want nothing more than to lock up an exclusive deal with you to prevent competing offers. Keep in mind that an unsolicited offer that raises your eyebrows may not be the best offer to be had. Unsolicited offers should be a starting point, not an ending point for a deal.

How to handle unsolicited offers to acquire your business.

There’s usually nothing wrong with taking the initial call provided you conduct yourself as if you’re talking with a competitor, and keep it brief. Use the call as a means of fishing for information about their company and their motivations. When the conversation turns to your business, keep it at a high-level and do not disclose any information about your company that is confidential. When in doubt, answer a question with a question, and redirect the conversation back to them. In an initial call you should have learned:

  • Who they are
  • Why they’re interested in your business
  • Whether they have the financial horsepower to complete a deal
  • Who else have they acquired
  • Their ballpark valuation range as a multiple of EBITDA
  • What business characteristics command the high-side of their valuation range
  • Their typical payment structure (cash, note, or stock)

Be forewarned, you’ll most likely be asked for financial information about your business. When you’re asked for financial reports, we recommend taking the old “let’s not put the cart in front of the horse” approach to get them to provide you with their valuation range, usually as a multiple of EBITDA. This will allow you to calculate their valuation range for your business without disclosing financial information. When calculating your EBITDA, it is important to account for all tax-minimization strategies including depreciation, owner perquisites, and personal assets expensed through the business. Race cars, personal vehicles, hunting trips, and other ownership benefits all add back to increase EBITDA. We find these have a significant positive impact on your company’s EBITDA, which in turn exponentially increases your business value.

If you’re unfamiliar with re-casting financials for EBITDA, we can help you with this important exercise – we do it all the time. In a recent valuation report we prepared for a client entertaining an offer for their business which generated $1 million in Net Income, we determined their EBITDA to be $2.5 million after adjustments. The business initially received an unsolicited offer for $10.5 million, which the owner was very excited about — until we brought in a second buyer who offered $15.5 million. What did our client do with the extra $5 million? It’s in a wealth management account growing with the economy.

Don’t make these common mistakes

  • Answering the question “What number would you sell your business for?”
  • Giving away the information farm too early – spending countless hours generating reports “because the buyer needs them to prepare an offer”.
  • Releasing confidential information (financial or otherwise) without securing a bulletproof Non-Disclosure Agreement. (If you need one, we’ll gladly send you one.)
  • Prematurely committing to a single buyer, without adequate review from professionals to determine if the offer is solid, and without backup buyers as leverage.
  • Doing it yourself. Selling your business is not a DIY project. We are here to help, and to increase the value of your deal.
  • Meeting in a bar with a competitor interested in buying your business. After a few drinks, you proceed to tell him how crappy their service is, their management is a joke, their fleet is junk, and their employees ain’t worth a damn. Then, while poking him in the chest, telling him how you could fix his business in 30 days if you were in charge. (This ACTUALLY happened more than once. You have to hear these stories from us!)

Getting an unsolicited offer to buy your oilfield business is exciting. It validates the value of the blood, sweat and sleepless nights you put into building it. Play it right, and you may be able to turn it into your biggest payday yet. With so many credible buyers available to you, we are confident in our ability to maximize the value of your deal.

If you’re interested in learning more about our views on the industry or have questions about what your business may be worth, feel free to give us a call anytime at 817.421.5940. Our motto is “no pressure, no B.S.”, and all conversations are held in strict confidence.