by Jonathan Rubin
As an investment banker, there’s a common phone call (or email) that all of us have received. Usually it comes from an advisor who has a client who owns all or part of a business. It can be an attorney, an accountant, a wealth manager, or other business advisor. Sometimes it even comes directly from a business owner. It goes something like this: "I (or my client) just got an offer from another firm, possibly a competitor, a PE firm, or even from one of the owner's own partners." The owner, who may have been thinking about selling the business in the past, is quite interested in pursuing the opportunity, but he or she doesn’t know exactly what to do. The buyer is putting pressure on the owner, either in the form of a time limit or with some sort of indication that if they do not move forward they would focus on an alternative acquisition target.
The caller typically poses three questions at this point:
- Can you help me/them?
- What should I/they do?
- Should I/they take the offer?
In considering whether to accept an unexpected offer, it's helpful to consider the pros and the cons. On the plus side, accepting the offer - or starting to negotiate with that one single bidder - has several advantages:
- Speed. You know who you're targeting, the buyer is interested, and the dialogue has already begun.
- Simplicity. For the same reason it is also usually the simplest path to follow. One does not have to manage multiple conversations, different perspectives, and perhaps most importantly, multiple requests for data.
- Confidentiality. Another advantage is that an owner may be able to sell the business without alerting the market to the fact that the business is "on the block." The more parties who are aware of a possible sale, the higher the probability that word will leak out.
There is only one negative of note, but it is critical: a single, direct negotiation is unlikely to attract the highest value for your business.
The Better Course
Negotiating with only one potential buyer is almost always the wrong path to take. A better strategy is to create a competitive bidding environment. Of course, as investment bankers, we have a vested interest in convincing business owners to conduct a competitive auction. However, in our discussions with business advisors such as the ones listed above, we find that almost uniformly they share this perspective. In our experience and based on our conversations with other bankers, we find that a business owner typically realizes transaction proceeds 5% to 100% higher in a competitive process vs. a single directed conversation, with the majority of cases ranging from 15% to 40% higher.
Why is this so? Because the potential buyer in a one to one negotiated transaction knows you have no alternative. That buyer has a much lower incentive to compromise, even if you have a good relationship, not because they are acting in bad faith; it is simply human nature. That is why buyers all want "proprietary deal flow," i.e., deals that no one else knows about.
You can read the second half of our article, covering how to communicate with the initial buyer, starting the bidding process, and entering the market, here. We always welcome your comments.