Most business owners are involved in one transaction, and that is when they sell their business. They lack experience with competitive bidding and the know-how that deal professionals take for granted. While sellers are likely to be anxious and concerned about getting into the market, the stress usually spikes when they receive a pre-emptive bid.
In most sales processes, the investment banker tightly controls the timeline to maintain a level playing field and the flow of information, which increases competitive fervor.
But a buyer with strong conviction may make a non-binding offer to take control of the process. The buyer will likely offer a high price, subject to diligence, with the intention to close quickly in exchange for exclusivity.
For the buyer, this gives them an advantage by taking control of the sale process. If diligence does not support their valuation, they will likely lower their price while trying to maintain exclusivity.
In a recent transaction, we expected to see valuations in the range of $30M, but received three pre-emptive bids ranging from $45M to $65M from both strategic and financial buyers.
The seller was caught off guard when these three pre-emptive bids arrived very early in the process, and he needed advice to decide whether to accept an offer and enter exclusivity, or continue with the regular, competitive bidding process.
So I gave him these pros and cons to evaluate the trade-offs:
The seller is:
In the end, to have conviction in the decision to accept a pre-emptive bid requires the seller to know the risks in the business and how strongly the business is positioned in its marketplace. Every business has problems, and the diligence process finds most of them.
If the business is poorly managed, or there are skeletons that owners do not want to address before diligence is conducted, then a pre-emptive bid may be a bad choice.
We spent time deliberating the trade-offs, and the seller selected a pre-emptive bid from a nearby strategic buyer. From the beginning, the thought was that this bidder was the most logical buyer. The products and distribution channels aligned well, the facilities could easily be consolidated, and it seemed like a good fit for marketing purposes.
The seller was excited to get started with diligence, since a closing would allow him to retire sooner and with greater security than he originally anticipated. He enthusiastically responded to diligence requests. Since the buyer was a strategic buyer that planned to consolidate entities with their existing management team, the depth and specificity of their questions was much greater than what was anticipated from financial buyers.
The deal proceeded nicely until the week before closing. For reasons still not clear, the buyer walked away. Their reasoning was that the fit was not as good as they hoped. We think it had more to do with problems in their core market, unrelated to the acquisition. We were confounded, but this was not the first time I have seen a deal go bust at the end.
While this was an emotional setback for the seller, he soldiered on. The early bid forced him to clean up a number of accounting and sales process issues that he would need to address anyway. But now, he could get paid for cleaning them up, instead of having to discount value to compensate for the problems.
The bankers restarted the original sale process and received a number of compelling offers. We found that the pre-emptive bids did reflect most of the market value of the business, and fortunately, had not left much money on the table.
So pre-emptive bids are just another facet of a sale process. With a novice seller, this type of competitive bidding was a surprise to be managed. Next time, don’t be surprised.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Roadmap to Selling a Business or Taking on Outside Investors and Structuring and Planning the M&A Transaction.]
Bruce Werner is the Managing Director of Kona Advisors LLC and served as an outside director on private company boards for the last three decades. Kona Advisors LLC provides advisory services to the owners, investors and CEOs of private and family-owned businesses. With deep experience in governance, succession planning, finance, strategy and management issues, Kona…
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