By Bassem A. Mansour
Co-Chief Executive Officer, Resilience Capital Partners
Negotiated deals – where an owner sells a business without going through an auction – have an undeserved reputation for generating lower prices. Superficially, it makes sense that sellers would get better value if there are multiple prospective buyers. Yet, negotiated or proprietary deals often can be a far more effective and efficient way of selling a company without sacrificing net returns.
Here are five reasons why a negotiated deal can make sense for companies looking to sell themselves.
- When time is of the essence, negotiated deals close faster. The streamlined process of negotiated deals means they can close much faster than those sold through auction, avoiding extensive duplicative due diligence by prospective bidders. Negotiated deals by definition involve buyers and sellers who are on the same page from the beginning, making the transaction process much smoother.
- Underperforming or distressed companies can find more flexible buyers through negotiated deals. While auctions may make sense for companies with superior profiles, underperforming companies or those that have business challenges (temporary or systemic) might benefit from selling to a buyer who is willing to work through those issues. Proprietary buyers tend to be more flexible in negotiations than auction buyers who prefer to buy problem-free properties.
- Sellers usually obtain similar prices whether through auctions or proprietary deals. It’s typically not true that proprietary buyers will low-ball sellers. In a world in which information about companies, their markets and their business prospects is readily available, valuations increasingly are transparent and efficient. Accordingly, buyers and sellers alike have a realistic understanding of what a company is worth. In many cases buyers are incented to pay a fair price to avoid the competitive process. Even in a negotiated transaction, most sellers will retain an investment banker to help streamline the process and keep buyers honest through the threat of an auction.
- Buyers of proprietary deals usually know exactly what they want. These deals result in less wasted time and expense and a greater likelihood of success. Acquirers in such transactions typically have predetermined boundaries in everything from the type of industry to potential deal-breakers to financial metrics such as revenue or EBITDA, meaning that fishing expeditions are rare and only serious deals are pursued.
- The proprietary deal process is less disruptive. An auction process can be highly unsettling. For one thing, it entails releasing large volumes of financial and operational information. Depending on the type of process, confidentiality clauses notwithstanding, sellers may need to be concerned with competitive elements as well as distractions to employees, customers and business partners. All of which may introduce significant uncertainty about the company’s future. This isn’t the case with all sale processes, but all risks should be considered.
If negotiated deals make so much sense, then why are they comparatively rare? Put simply, excessive seller expectations. Owners of companies frequently have an outsized view of their value. Proprietary buyers are usually the first in the door, and they are the ones who deliver the news about a company’s value. If the price is too low, the owner may pursue an auction. Often enough, they realize that the original offer was close to the mark, especially when all risks and costs are factored into the price.
By that point, however, the time and expense associated with launching into an auction process are so great that they may continue down that path rather than restarting the alternative. They would have done much better to approach a sale with more realistic expectations to begin with, realizing that – in today’s markets – no one is able to steal a company, and that a negotiated or proprietary deal may well be the best approach for them.