Create a competitive environment and switch the dynamics in your favour!

Creating a competitive environment is imperative when you’re selling a business. It doesn’t matter whether you’ve been approached directly by a potential buyer or if you are selling through a third party.

It’s a buyer’s market so it’s important that you are able to switch the dynamics in your favour and the best way to achieve that is through a controlled sale process.

Of course many business owners receive unsolicited offers, usually from a competitor. Although its tempted to proceed. Why? The moment a buyer gains exclusive access to your business, most of your negotiating leverage as a seller is lost. Moreover, it will leave you with few (and mainly unappealing) alternatives to transacting with that party.

You need to keep the dynamics in your favour and the only way to do that is to create a structured process, whether you choose to do that yourself or instruct a third party to handle it for you.

Unsolicited offers

Unsolicited offers can be very flattering, particularly so if received from a larger, well-known company. You may well be seduced into thinking that an exclusive deal with this potential buyer will be quicker, easier and cheaper than hiring an advisor. Don’t be fooled; it rarely works out that way. It is a common fallacy that an exclusively negotiated deal is faster, easier and quieter than a structured process. In reality, the acquirer with exclusivity rarely moves with urgency, often extending due diligence (and increasing your costs!) and dramatically reducing the likelihood of closing at the agreed price, if at all.

Whilst successful transactions ultimately do close with a single buyer (and are, hence, exclusive), the only sure way to ensure that you get the best price and the best deal structure is to avoid entertaining only one potential buyer.

Even supposing that the offer is from a reputable company (it does happen), the dynamics of the transaction now puts the buyer in control of a one-horse race. He’s holding the trump card, controlling every aspect of the transaction – take it or leave it!

Let that bidder know that you will be doing so and that the bid will be given serious consideration as part of the process. You might also want to offer that bidder “first mover advantage” – say it with humour but make it clear that you plan to speak with other potential buyers.

Create a structured process

If you are selling through a third party advisor, or even if you’re decided to conduct the process yourself, the need for a controlled, competitive process is vital.

As I said before, it’s a buyers’ market, so you will have been advised to prepare your business for sale and to make it as attractive an acquisition prospect that stands out above other businesses for sale in your sector. The next, and critical stage of the process, is for you, or your advisor, to create a well-researched list of potential acquirers. It’s time consuming and its hard work but it will pay off.

A larger pool of acquirers will result in more exploratory meetings. Knowing that you have more than one interested party, even though you won’t have fully qualified them at this stage, will give you confidence and that will come through in your exploratory discussions.

Make sure that you meet with several interested parties, even if you feel that the first meeting is your preferred option. Bear in mind that most buyers are experienced and will have a purely commercial view of the transaction whereas you may not have sold a business before and you will, without doubt, have emotional reactions to the process as it continues.

After the exploratory meetings your next move is to get written expressions of interest from the companies you wish to proceed with further. That way you’ll have confirmation of the price they’re proposing, how a deal might be structured, in terms of what they are buying (e.g. assets or shares) and how the deal will be funded. You’ll also get a clearer understanding of their timescales.

At this stage you may be asked to sign an exclusivity agreement to protect the buyer’s interests. Do so with caution – until you’ve signed exclusivity control of the transaction rests with you because you still have choices!

Whilst we’re on the subject of choices, always remember that you don’t have to sell at this point. You may want to, but in the majority of cases you don’t have to. That’s a powerful message when you’re in those initial meetings.

Once you and your advisors (you’ll need an experienced commercial lawyer by this stage) are certain that this is the best deal for you, that the buyer is able to fund the acquisition and that the deal structure is right, then you will be expected to enter into a period of exclusivity. Make sure that the exclusivity period is time limited; that way you retain an element of control and keep the momentum going. The last thing you want at this stage is protracted due diligence; this is a real danger point as “deal fatigue” is one of the main reasons that deals fall apart.

In conclusion

The importance of competitive tension cannot be overstated. Having a controlled process will enable you to identify the best potential acquirers and will create a sense of urgency for them to move quickly and win your business over a competitor. The benefits are that you will achieve the best value for your business and the transaction will be accelerated, propelled by this competitive pressure.

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