The most important step that you can take when selling your company is to create a competitive bidding process. Simply put, competition drives value in M&A transactions.
We are often introduced to business owners who have already been approached by a buyer to acquire their company. The discussions and negotiations continued for months, but the buyer never made an acceptable offer. The reason is that there is no pressure on the buyer to extend their best offer since there is no competition.
The most effective way to sell a company at the highest price is to run a structured M&A process by including multiple buyers, providing a comprehensive information memorandum, and setting formal bidding procedures. Potential buyers need to know that it is a competitive process and the ultimate buyer will be selected based on the most favorable purchase price and terms.
My partner and I have been selling mid-sized companies for over twenty years. We have completed over 130 transactions in 30 U.S. states and Canada. The one constant throughout all of these transactions is that when competition is introduced into an M&A process it yields much better results including:
1. A Higher Purchase Price
When buyers are dealing one-on-one with a seller, their negotiating tactic is often to start low and incrementally increase their offer until they reach the lowest point at which a business owner is willing to sell. With competition, the buyers are forced to put up their best offer or run the risk of losing the deal to another buyer.
2. More Favorable Terms
In addition to purchase price there are many other factors that are important. The structure of the transaction can have a significant effect on the Seller’s after tax proceeds, and the terms of the deal including representations, warranties, and indemnities are important to minimize the Seller’s risk post-closing. The seller has much more leverage to negotiate these deal points when there are multiple buyers competing for the company.
3. Increased Certainty of Closing
Negotiating a great offer is one thing, but if it doesn’t close then it was all for nothing. During due diligence if the buyer knows that the seller has back-up offers they are less willing to play games and are more focused on getting the transaction closed. Competition provides the seller with additional negotiating leverage during this critical part of the process.
4. An Effective Back Up Plan
Occasionally deals do not close. Sometimes a buyer will back out or is unreasonable in negotiating the final terms of the purchase agreement. If the M&A process was run properly with multiple buyers included, you will have back-up offers and the ability to re-engage with the other bidders that will be willing to step in.
Describing all the facets that make up a competitive bidding process is too long for a blog post, so if you have an interest in learning more about it, please call us or send us an email.