Competitive Tension: The Importance of a Broad-Scale Offering.

6 minute read

Competitive Tension The Importance of a broad-scale offering

Selling a business is a complex, multi-step process. Engaging a broad-scale offering is a crucial aspect of the process and strategy to ensure maximum value and the best possible terms for the seller.

This contrasts starkly with the limitations inherent when sellers choose to negotiate directly with a single party or a small group of potential buyers. Creating a competitive environment by attracting a large pool of interested parties is crucial to optimizing outcomes in the business sale process.

How Business Owners End Up Facing a Single Interested Party

It's not uncommon for business owners to be approached directly by potential buyers expressing exclusive interest. We see it most often among participants in the same industry or from financial sponsors that take notice of a company’s rapid growth in a sector they are targeting. 

The buyer often has a specific strategic objective, such as entering a new market, acquiring unique technology, or eliminating competition. This direct approach might seem appealing and straightforward – it also feels great as a business owner to be ‘courted’.  And if you can pull off a deal on your own (the assumption is) you also stand to save the transaction costs. However, this path obscures – and limits – the true market value of the company and the spectrum of possibilities that a competitive bidding process always produces.

The Pitfalls of Limited Buyer Engagement

Negotiating with a single party, or a narrow group of buyers inherently restricts a seller's leverage.  Without the pressure of competition, the buyer is always in a stronger position to dictate terms.  We have seen this manifest in significantly undervalued offers, less favorable conditions, and protracted negotiations aimed at further tilting the deal toward the buyer's advantage.

This type of constrained negotiation not only limits the financial outcome, but we’ve also seen it lead sellers to compromise on non-monetary terms that were very important to them – such as their future role in the business and/or post-closing transition, the preservation of employees' jobs, or the continuity of the brand.

The Advantages of Engaging Multiple Interested Parties

Conversely, creating a competitive environment by engaging a broad-scale offering significantly enhances the seller's negotiating position. This approach drives up the value through competitive bidding, and equally important, it offers the seller a diverse range of proposals to consider that, in our experience, always encompasses aspects beyond just the financial. It allows the seller to weigh different visions for the future of the business, the cultural fit of the potential buyer, and the strategic directions proposed. 

Furthermore, it provides a fallback plan should negotiations with the preferred buyer falter.  In other words, it keeps the buyers ‘honest’ and gives the seller’s team the ability to maintain ‘deal momentum’ with a preferred counterparty.  We have advised sellers in the past to end negotiations with buyers when we perceive those parties are not acting in good faith or their terms start to morph into something that’s off-market. This doesn’t happen often, but in these cases, the path to deal completion is so much smoother when there is a fallback plan including back up offers.  This maintains confidence for all parties – in the company and the deal process.

The Role of M&A Advisors in Maximizing Outcomes

Navigating the complexities of selling a business, from initiating contact with potential buyers to closing the deal, underscores the value of partnering with an experienced M&A advisor. These professionals bring a lot to the table to optimize the outcome for the seller including: an extensive network ensuring the seller engages with the broadest pool of potential buyers; expertise in valuing businesses, crafting a compelling sell-side offering, alleviating the workload and burden on the seller; streamlining the due diligence process and mitigating stress from any bumps in the road.  This allows the seller to continue running the company in the best manner possible so there aren’t any hiccups in performance – which is the number one deal killer.

Experienced M&A advisors excel in creating a competitive bidding environment from a large pool of counterparties.  They know how to manage the information flow to stoke and maintain buyer interest and leverage ‘competitive tension’ to secure the best possible terms.

Their negotiation expertise is critical in navigating the delicate balance between driving up the offer value and maintaining a positive relationship with this group of potential buyers. Furthermore, their strategic counsel helps sellers evaluate offers – not just on their financial merits, but on alignment with the seller's objectives for themselves and the business's future direction and legacy – all against the backdrop of decades of experience having seen and closed hundreds of transactions.

Working with a good M&A advisor may initially appear to be an added expense to the deal. But time and time again, the incremental value achieved by their involvement versus navigating the sale process alone (or with an attorney moonlighting as an M&A advisor) far outweighs the cost.  Research has shown that on average, M&A advisors secure 20% higher closing valuations – substantially exceeding the advisor's fees. In addition to the higher cash at the closing, they also bring insight about structuring deals in ways that can significantly benefit sellers, such as tax matters, contingent payments, and other terms that can greatly enhance the seller’s effective valuation and reduce his post-closing risks.

The discipline of engaging a significant number of interested parties in the sale of a business, supported by the expertise of an experienced M&A advisor, is crucial to realizing the full potential value of the sale. This approach not only enhances financial outcomes but also empowers business owners to make more informed decisions that align with their broader objectives, ensuring a legacy that continues to thrive under new ownership and the greatest impact possible from – and after – deal completion.  And in virtually all cases, the greater cost to the seller is not from the involvement of an M&A advisor, but from their absence.

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