Would you rather have interest from one buyer, or many?
Many business owners and their accountants are unaware of the significant advantages that a structured M&A process can offer when it comes to selling a business. Often, businesses are approached by private equity groups with acquisition offers, leading owners to engage in a single-buyer negotiation. This approach can result in suboptimal pricing and terms, as the seller is locked into the buyer’s proprietary process and timing, with limited leverage to negotiate favorable conditions.
The solution lies in utilizing a limited auction process, orchestrated by experienced M&A advisors. This method creates a competitive market by involving multiple preselected buyers, ensuring that the business owner receives the best possible price and terms. By understanding and implementing this process, accountants can better guide their clients through a successful business exit strategy. Below is an outline of the limited auction process and the benefits it offers:
Limited Auction Process
Initial Outreach:
Anonymized Teaser: A large group of preselected buyers receive an anonymized teaser or tear sheet about the business.
Interest Indication: Interested buyers contact the M&A advisor to express their interest.
Competitive Bidding:
NDA Signing: Buyers sign a Non-Disclosure Agreement (NDA) to receive a complete marketing package.
Indication of Interest (IOI): Buyers submit their initial bids by a specified due date, knowing they are in a competitive process.
Bid Review and Selection:
Bid Evaluation: The M&A advisor and seller review and sort all IOIs based on the best fit.
Management Meetings: A subset of bidders (typically 1 to 5) are invited for video calls with management.
In-Person Meetings:
Finalist Selection: The top 3 or fewer bidders are invited for in-person meetings.
Letter of Intent (LOI): After these meetings, bidders submit LOIs with more defined terms and price.
Negotiation and Final Selection:
LOI Negotiation: The M&A team and sellers negotiate with the bidders to secure the most favorable terms.
Final Buyer Selection: The seller and the chosen buyer sign the LOI.
Closing Phase:
Due Diligence and Finalization: The final phase to close the deal typically takes about 90 days.
Benefits for Accountants and Their Clients
Maximized Value: Creating a competitive market often leads to higher bids and better terms.
Informed Decisions: Accountants can help their clients understand the process and make informed decisions about exiting their business.
Strategic Planning: Early involvement of M&A advisors ensures a well-planned and executed exit strategy.
Risks of Not Using a Limited Auction
Suboptimal Price and Terms: Simply setting a price and putting it out to market often yields less optimal results. Without a competitive process, the seller may not achieve the best possible price or terms.
Single Buyer Risk: Good businesses are often approached by private equity (PE) groups looking for acquisitions. Engaging with a single buyer without exploring the market can lock the seller into that buyer’s proprietary process and timing.
Buyer Control: If only one buyer is at the table, they can control the process, including the terms of the deal, even after an LOI is signed. This can leave the seller feeling captive to the buyer’s demands.
Limited Negotiation Power: Without multiple bidders, the seller has less leverage to negotiate favorable terms.
Potential Delays: A single buyer can delay the process, knowing the seller has no other options.
Role of M&A Advisors
Market Discovery: M&A advisors can create a competitive market, ensuring the seller gets the best possible deal.
Process Guidance: Advisors guide sellers through the process, helping them understand which type of sale process is best for their goals.
Risk Mitigation: By involving an M&A advisor early, sellers can avoid the pitfalls of engaging with a single bidder and ensure a smoother, more advantageous sale process.