As an M&A advisor with significant transaction experience, we know that no two deals are alike.
While there certainly are best practices to be studied, the best approach for your company depends on a number of priorities including speed, confidentiality and level of involvement by executives.
An experienced sell-side advisor will have an understanding of a seller’s goals and achieve consensus with shareholders and board members to complete a successful deal.
Here are four variations of the sell-side process:
Preemptive Sell-Side Process:
In this approach, the universe of potential acquirers is narrowed to between one and five so that only the most likely candidates are approached.
When outreach efforts are focused on only the best acquirers, speed and confidentiality are maximized. There also is minimal disruption to the day-to-day running of the business.
The main disadvantage is that a preemptive sell-side process is unlikely to maximize value as there is no true competitive market to determine appropriate price. Additionally, outcomes are dependent on negotiations between only one or a few potential buyers, so it is possible that the transaction is abandoned before it can be closed.
Preemptive sell-side processes are best when there is a clear sense of the most logical acquirer, or if the seller is in a strong negotiating position. The process typically takes four or five months.
This is a broader technique used to screen and identify the five to 10 most likely acquirers.
As with a preemptive sell-side process, speed and confidentiality are key advantages to a targeted solicitation. There is limited disruption to the business, and sellers can avoid the perception that the business is being shopped.
The drawbacks are that targeted solicitation requires significant senior management time and commitment, and the limited pool of candidates may not maximize selling value.
Targeted solicitation is best when there is a limited group of logical acquirers, when confidentiality is key, or to have limited business disruption through the sale process. At five to six months, a targeted solicitation can take slightly longer than a preemptive sell-side process.
With this approach, 10 to 25 logical acquirers are contacted.
The benefit is that, unlike with a preemptive sell-side process or targeted solicitation, limited auctions provide a reasonably accurate test of market price by creating a sense of competition amongst buyers. And there is still minimal disruption to day-to-day business operations.
However, limited auctions can take longer—six to seven months—than a preemptive sell-side process or targeted solicitation, and the market is still limited compared to a broad auction.
It is best to employ this technique when seeking a balance between maximizing value, speed of execution and minimizing business disruption.
With this method, a broad range of potential acquirers—often 25 or more—are contacted to gauge their interest in pursuing a deal.
Competition among a number of buyers provides the truest and most accurate test of a seller’s market price. Additionally, when there are 25 or more potential acquirers, a seller has many acquisition structures to choose from.
Broad auctions do come with their disadvantages, such as having the highest risk of business disruption and potential difficulty in maintaining confidentiality (even with the appropriate agreements in place). At seven to eight months, these deals typically take longer than when fewer buyers are engaged in discussions.
When maximizing shareholder value is the top priority, broad auctions tend to be logical.
Before going down the path of a sale, it is important to think about what your organization is hoping to accomplish. Depending on your priorities, one sell-side process structure may be preferred to another.
Having completed more than 150 deals, Copper Run has significant combined experience and we know the ins and outs of all sell-side process alternatives. We welcome questions as to how your organization can best approach a sale.
Matthew Roberts is Vice President at Copper Run. He specializes in the business services, distribution and manufacturing sectors.