It May Sound Like a Good Deal
When selling your business, is it better to negotiate directly and exclusively with one super-compatible buyer? Or should you always “test the market” by seeking competing bids from multiple potential buyers? It depends on the size and nature of your business, how many potential buyers exist in the market, and what you expect from the transaction.
From my experience, the most successful deals aren’t solely about finding the highest bidder. Over the long term, a deal is much more likely to succeed when both the buyer and seller want to ensure the long-term stability and success of the company. They are conscious capitalists who want to take into account the relationships with employees, long-time customers, partners, and vendors.
Old-School Traditions
Before private-equity groups became active M&A players, brokers or investment bankers often set up two-round bidding processes.
In the first round, they sent out teaser letters to multiple companies that might be interested in acquiring the company the owner wanted to sell. The teaser letter highlighted the positive attributes and financials of the company without naming the actual company for sale.
When potential buyers expressed interest and signed a non-disclosure agreement, they received more information about the company for sale, including details about its leadership team, and assets and liabilities. At this point, potential buyers were invited to submit initial bids and non-binding letters of intent.
During the second round, the sellers and their advisors met with the potential buyers, answered questions, and gave bidders access to secure online data rooms for due diligence.
A definitive agreement was then drafted and sent to those buyers who expressed interest in submitting a final bid. When the final bids were received, the investment bankers or brokers urged the seller to accept the highest bid.
Here are some reasons why some owners of middle-market companies have moved away from that process.
Your company may not attract many bidders. For example, some entrepreneurial CEOs or private-equity firms choose not to participate in acquisitions that involve bidding wars.
In his book “Selling without Selling Out,” Sunny Vanderbeck of Satori Capital noted that they rarely look at companies being sold through traditional bidding processes because “Our goal is to pay a fair price for a business that aligns with our values. Without a doubt, some qualifying businesses will launch a formal auction, but that system minimizes our exposure to the management team. It takes real time to dig in and discover whether we align with the seller’s culture, goals, and plans.”
Confidential information is revealed to more people. As more people learn about the inner workings and finances of your business during the auction process, it becomes more likely that some of your proprietary information will leak out – perhaps to a competitor.
It wastes time and resources. Unsuccessful bidders invest a lot of time and money in the process and end up with nothing to show for it. Sellers waste time responding to multiple requests for different types of information from potential bidders who may not be serious about making a final offer.
Most private equity groups don’t wait to get teaser letters notifying them about potential businesses to buy. Private-equity groups have well-established, cost-efficient procedures for identifying and approaching companies that match their investment objectives.
Private-equity buyers build networks of well-connected analysts and consultants within a targeted industry who can introduce them to forward-thinking business owners and CEOs in that industry.
The highest bids might come from buyers who don’t share your core values. As we discussed in a previous post, conscious capitalism involves making deals that aren’t solely about how much money you and your family can rake in. When you demonstrate that you care about what happens to key stakeholders after the business is sold, you will be respected for years to come.
After spending so many years building a viable and appealing business, it would be a shame to see the reputation you worked so hard to build destroyed as a result of a sale that was not well thought out.
For sellers who are new to the M&A process, we recommend downloading our FREE guide, Demystifying M&A Jargon.
I founded The LaManna Consulting Group to help facilitate win-win deals for buyers and sellers. We help qualified buyers and investors find businesses that are ready for acquisition or transition. We help owners improve their businesses, increase value, and position strategically in anticipation of sale, exit or succession. Whether you’re looking to buy or sell, we can help. Give me a call at (561) 543-2323 and let’s chat.