As a M&A service provider for sellers of middle market companies, we spend a great deal of time preparing and strategizing on the right approach to ensure we achieve the maximum price for our clients’ businesses. Many factors go into this process, such as conducting in-depth due diligence and tying up loose ends, preparing the company history and sales pitch, researching and identifying the best buyers, and very aggressive marketing and negotiation tactics. An important element in achieving the highest price relates to the actual sales and marketing approach and the process used to create a competitive market for the company. Unlike publicly traded companies for which there is an established market that makes it easy to buy / sell shares at any time, there is no liquid market for private companies. Therefore, we must create a market.
Why is creating a competitive market for the seller’s business so important? Creating a competitive market puts pressure on potential buyers to offer the best deal. The seller maintains leverage by pitting buyers against each other to achieve a desirable outcome. Less aggressive buyers tend to shy away, and the process narrows the list of potential candidates down to serious buyers. Building a competitive marketplace allows the seller to simultaneously evaluate multiple offers, deal structures, and potential buyers, putting them in a position of strength to decide which opportunity is the best to pursue. Building a competitive market allows the seller to see a wide range of possible offers. In a competitive bidding situation, it is common for the spread from low bid to high bid to be greater than 50%. Imagine how much money a seller could lose if they only went after the lowest bidder in a direct, non-competitive negotiation. It is significant. How would the seller know if he is getting the highest price without executing a transaction process that builds a competitive market? Also, uncompetitive direct negotiations, especially those based on unsolicited offers, rarely result in the highest prices. The buyer knows that they are the only party at the table and does not feel pressure to present their best offer. Example of a case study of the sale of a company
Here is an example showing the possible range of values received from four potential buyers for a private company. Although it does not come from a real deal, it is a representation based on a series of actual private company sales, resulting in a similar disparity between the values. Offers received were $ 27 million, $ 32 million, $ 36 million, and $ 40 million. The spread between the high bid and the low bid is almost 50%. What if the seller of the company had NOT created a competitive market and instead engaged in a direct and one-time negotiation with Buyer D only? If the seller closes the deal, he has given up a large amount of money. However, I would never know! The auction process can be seen in action in the recent bidding war between Dell and Hewlett Packard for 3PAR, which significantly increased the value of 3PAR. http://money.cnn.com/2010/08/27/technology/dell_3par/index.htm In summary, like many bidding situations in life, creating competition for a seller’s business is critical to achieving success. Maximum price. Running a process that creates competition keeps leverage in the hands of the seller.