As a boutique investment bank providing merger and acquisition services to owners of privately held middle-market commercial and industrial companies, we spend a great deal of time preparing and strategizing about the right transaction approach. We want to achieve the maximum price for our clients’ businesses.
Important Factors for Maximizing Business Value
Many factors play into this process: Performing in-depth due diligence and tying up loose ends; Preparing the company’s story and sales pitch; Researching and identifying the best buyers; and Very aggressive marketing and negotiation tactics. One important element to achieving the highest price relates to the actual sales process used. This sales process must create a competitive bidding marketplace for the client’s company. Unlike a publicly traded company with an established market, there is no liquid market for a private company. Thus, we must create the market.
Benefits of Creating a Competitive Bidding Market for a Private Company
Creating a competitive market puts pressure on potential buyers to offer their best deal. The seller maintains the leverage pitting buyers against one another in order to achieve a desirable outcome. Less aggressive buyers fall away and the process whittles the list of buyer candidates down to the serious buyers.
Building a competitive market allows the seller to simultaneously evaluate multiple bids, deal structures and potential buyers. This puts him in a position of strength to decide which opportunity is best to pursue.
Building a competitive market allows the seller to view a broad range of bids. It is common for the differential from low to high bid to be more than 50% to 100%. How would the seller know if he is getting the highest price without a sale process that builds a competitive market? Imagine how much money a seller could give up if enters into a non-competitive, direct negotiation with a low-bid buyer? It is significant costing millions.
Rarely do non-competitive, direct negotiations, especially ones based on unsolicited offers, result in the highest prices. The buyer knows he is the only party at the table. He feels no pressure in putting forth his best offer.
Case Study – Creating Competition to Maximize Sale Price
Here is an example showing a range of values received from five buyers for one of our investment banking clients. Note the disparity among values:
- $40 million
- $36 million
- $35 million
- $32 million
- $27 million
The differential between the high bid and low bid is almost 50%. What if the client had NOT elected to create a competitive market? But instead, pursued a one-on-one negotiation with Buyer 5 only? If the client closes the deal with Buyer 5, he has given up $13 million as compared to what he could have achieved. However, he would never know it!
Creating Competition for a Seller’s Business is Critical for Achieving Maximum Price
In summary, just like many bidding situations in life, creating competition for a seller’s business is critical to achieving maximum price. Engaging a middle-market investment bank to run a sales process creates competition that drives up price.