'Create competition' is our top tip when selling a business, because a competitive bidding process works wonders in business exits. We see it time and time again. It's so striking and so regular that we've spent a lot of time thinking about why competition among buyers is so powerful for a seller.
A competitive auction process pushes a buyer from his greedy 'default position' to a fair 'rational investor' position. Let's explain that.
If synergy value and strategic value in a business combination with a buyer are significant, there is a world of difference between the offers which result from these two different lines of thought.
Only because if he didn't, he would fail to win the prize. In other words, because he has to compete with other potential buyers who are also attracted by synergy and strategic benefits.
It's the competition that makes it impossible for any one buyer to 'steal' synergy and strategic value (and even some stand-alone value). A buyer may not like having to share synergy and strategic value with the seller, but he will do so if it's the only way to secure an investment which offers his target return on investment.
So the seller's challenge is to create the kind of competitive process that gets buyers off their greedy high horses and onto level ground, where they all understand that significant synergy and strategic value is at stake and will have to be fought for. This is where Shield's experience and expertise is worth its weight in gold.
A competitive bidding process works to confirm and cement the judgements buyers are making about the value they see in a situation.
Business valuation, though it has (or ought to have) foundations in economic fundamentals, is still a 'psycho-social' phenomenon:
So that's why a competitive auction process is crucial for optimising the outcome of a business exit. And that's why you may well get into trouble if there isn't any competition, especially if a single potential buyer comes to realise that fact.
Sophisticated buyers, by the way, will test sale processes to see if they can detect signs that competition is lacking, and you should expect them to exploit the situation mercilessly if so.
One important countermeasure worth taking in any event is to preserve the 'we can trade on' scenario.
It is astonishing to us that shareholders sometimes make announcements like "we've taken a decision to sell this (non-core) business by year end". Why give such a hostage to fortune?
We've seen last-remaining bidders for such businesses ruthlessly exploit sellers' lack of alternatives when a buyer realises he has a seller over a barrel. But a seller who has nurtured the alternative of carrying on with the business and relaunching a business sale process at a later date is protected from exploitation by a sole buyer.
The 'trade on' alternative in effect preserves competition, by creating the prospect of a competitive process in the future. Here again, even in gloomy scenarios, we find that a competitive process works wonders!
At Shield Corporate Finance, we advise that potential sellers may well be better off waiting - to avoid the risk of a failed business sale, or to achieve a better price when market conditions improve. In fact, we have developed a proprietary way of testing the market in order to help clients determine whether or not to sell a business under prevailing conditions.
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