Knowing the sell-side M&A process is beneficial for both those considering an acquisition and those wishing to sell. Both parties need insight into the way the sell-side processes work if they want to plan strategically. M&A advisory firms assist in these transactions, and they can explain these processes further. The more you can learn about the sell-side process, the more prepared you will be when deciding what type of sell-side process you and your M&A advisor will use to move forward with the transaction.
This blog will explain each of the main three types of processes involved.
Would you like to sell your business? We have a blog for that.
Traditional Sale Process (Auction)
The traditional sale process is a highly structured auction process where your business is marketed to a wide array of potential buyers. In a traditional sales process, your M&A advisor contacts the “full universe” of potential buyers (that you both agree make sense) for your company, seeking to attract the highest number of bidders possible. Depending on your goals for the sale process, you and your merger and acquisition consultant can work together to determine what characteristics you are looking for in an acquirer and how big this pool of prospects should be.
Benefits and Disadvantages of Broad Auctions
There are many benefits of the traditional process, making it appealing to many owners wishing to sell. The more potential buyers in the process, the more potential offers and options a seller will have to choose from. Additionally, with more bidders, there is more competition, and the likelihood of higher bids increases, which helps to ensure that you get a “market” value for your company.
The traditional sale process can benefit you by:
- Increasing competition;
- Allowing you to potentially evaluate a number of different types of buyers;
- Allowing you to have confidence that you have compared and evaluated all possible offers for your business; and
- Helping you achieve your company’s highest “market” value.
There is also a number of potential disadvantages to running a traditional auction for your business. Confidentiality is typically an important ingredient in a transaction. However, in a traditional sale process, maintaining confidentiality is much more difficult, based on the fact that there are a large number of potential buyers that become aware your company is “on the market”. If confidentiality of the process is critical to a seller, they should speak with their advisor about ways to potentially mitigate this risk.
Additionally, going through the traditional process brings in the possibility of disruptions in your business caused by the length and involvement of the transaction process itself. A full auction for the business may also require a great deal of time from you and your management team (if they are involved).
Other disadvantages of the traditional sell-side process include:
- Requires revealing private company information to a wide range of potential competitors;
- May drive away potential buyers who avoid intense competition;
- Process may take up to twelve months if negotiating with multiple buyers and/or unsophisticated buyers; and
- External (market) factors can potentially stop a transaction in process.
In theory, the only significant difference between a traditional sale process and a limited process is the number of bidders, where a limited auction has fewer potential bidders (for example, 10 – 15). However, this type of process also offers a much more flexible structure and timeline for sellers.
In a limited auction sale process, you and your M&A advisor will have individual discussions with the targeted potential buyers. These preferred bidders are usually readily identifiable and can be agencies that you already know or have some form of relationship with. It is more likely that this smaller group is already a part of your industry and has similar services and capabilities.
Many companies wishing to sell may see the limited auction as a more efficient process in terms of time and investment. Like the traditional process, it fosters competition, but it is not as structured and does not require as many resources on your end. Your M&A advisor should be able to assist you in managing a good deal of the communication, negotiation, and discussion with these parties.
The benefits of a limited auction may include:
- Some competition, leading to relatively high bids;
- Smaller group of vetted, preferred buyers;
- Confidence that you have compared and evaluated a variety of offers for your business;
- Offers more confidentiality than a public auction; and
- Certain potential buyers may be more likely to participate if they are under the impression that they are not participating in a pure “bidding war.”
The disadvantages revolve around the fact that a limited auction is a middle ground. If you want to reach the widest group of bidders, have the most competition, and get the most accurate assessment of market value, you might do better choosing a broad auction. On the other side, if you want a faster and more flexible process and greater confidentiality, then a targeted sale might be better suited to your individual wants and needs.
A limited sale process has the following disadvantages:
- The process can lead to owners realizing full value for the company, but sometimes not the maximum value;
- External factors can potentially stop a transaction mid-process;
- The process still requires revealing private company information to a number of potential competitors; and
- The process can take approximately six to twelve months to complete.
Exclusive Negotiation with Single Buyer
An exclusive negotiation with only one buyer is usually a fairly simple, straightforward, and relatively fast process. This type of transaction allows you to minimize the resources required to complete a transaction and maximize the potential confidentiality around the discussion.
Compared to the other processes, an exclusive negotiation is less disruptive to your business. Additionally, it can also be completed much faster than any other process (depending on both the buyer’s and seller’s needs) since you would only be negotiating with one party. This is most often the preferred process for sellers that want to complete a transaction quickly.
The benefits of exclusive negotiation include:
- Likely to already have a relationship with the potential buyer;
- Less resources and time required than other processes;
- Private company information is not revealed to multiple potential competitors;
- Fastest type of process;
- Little disruption to business; and
- Highly customized process to accommodate the particular needs of the buyer and seller.
An exclusive negotiation does have some drawbacks. Since there is only one offer, there is really no competition in the bidding process. You should talk with your M&A advisor before beginning the process to get a fair evaluation of the price and structure that is reasonable for your business, as well as to make sure that both parties are clear about your financial goals for the transaction.
To summarize, negotiating with a single buyer presents these challenges:
- No bidding competition;
- Can potentially result in a discount to full value for the seller;
- Your willingness to participate in this process can (though not necessarily) communicate weakness to a potential buyer; and
- Less power to negotiate than with broad or limited auctions.
Choosing the Right Process
Which type of sell-side process is best suited for you and your business? That depends on your preferences, your situation, your company, and market conditions. Before making a decision, you should speak with your M&A advisor about your unique goals and needs. The right M&A advisor can inform you, share their experiences, advise you, and guide you through whatever process you choose.
Clare Advisors is a boutique M&A advisory firm that specializes in representing advertising, marketing, and media agencies across the nation. Founder John C. Burns III is an M&A advisor with expertise in sell-side and buy-side M&A services, as well as financial advisory services. In his 20 years of financial management and investing banking experience, he has successfully completed over 30 M&A transactions, working with both buyers and sellers.
Do you have questions regarding which process is best for you? Contact us to get started.