Companies are sold not bought
Many entrepreneurs think that when their company is ready to be acquired, a buyer will knock on their door and make an offer. This does happen, but less often than someone knocking on the door of your house asking to buy it. Even if an unsolicited offer does come in, boards should almost never approve a company sale when there is only one bidder because the price will almost certainly be too low. Even if the buyer actually did pay a fair price, there would be no way to avoid the perception that the price was too low and the board did not do its job properly.
In almost every private company, or small public company, if an unsolicited offer is made it’s usually a lost opportunity. This is because there is almost never enough time to get other bids before the first party loses interest.
Successful company sales almost always involve a competitive bidding process.
There are several reasons why a bidding process is essential to sell a company well:
- Negotiating strength
- Maximizing Business Valuation
- Effective governance
As I described in the story of my first company sale, buyers often abruptly stop calling for no apparent reason. Most often it’s because something else came up that was more interesting, or something changed inside their organization. When this happens, it’s usually impossible for the team selling the company to re-engage them.
Company sales transactions also have a disconcerting tendency to blow up at the 11th hour and 59th minute. In fact, in all of the exits I have been part of, I cannot recall one where there wasn’t some last minute potential deal breaker or sticking point. This is often because both sides often leave the really contentious issues to the very last minute. Another way to look at it is if there weren’t a few sticking points the company sale would already be complete. By definition these sticking points are contentious and difficult to navigate, which is why they often blow the deal up.
For the safety of the selling shareholders, it’s essential to have multiple bidders going into the final term sheet negotiations.
Like most things in life, once you have actually completed ten or twelve similar company sales it’s reasonably easy to predict how long the process will take. Most shareholders, once they have made the decision they want to sell the company, would like to complete as quickly as possible and, more importantly, with as much predictability as possible.
Predictability is also very important for the business. The employees often know when a company is for sale. This inevitably creates uncertainty and anxiety. The senior team knows their life is going to change and they’d like to know how so they can plan their personal lives. The industry also often knows when a company is in play and this can affect sales, trade credit and strategic relationships.
The worst thing that can happen is a company engaging with just one interested party. This is what usually happens – talks progress for six to nine months, then for one of the standard reasons, discussions terminate. At that point, the company has to start the entire process again – often losing a full year in the process.
Even worse, if a year goes by and the company is not sold, everyone from the shareholders, to the employees, to the customers will be sure something is terribly wrong. This will probably start to erode the fundamental value of the company. The team responsible for selling the company will also suffer from selling fatigue.
Once a board makes the decision to sell the company, the process must be effectively managed to ensure full redundancy all the way to the signing of the binding term sheet. The only way to ensure this is with multiple bidders.
I’ve had the pleasure to work with, learn from and be sold by, some truly outstanding sales professionals. I think most of us sell most of the time… well, at least when we’re awake anyway. After a few decades of working with some of the best, I believe you can develop a pretty well-tuned veracity meter. This is not to suggest sales people are not truthful, but it is probably fair to say that the successful ones usually highlight the positives in their product.
When companies are being sold and bought the people around the table are all usually pretty sophisticated. But there is still a sales process going on, and very often millions of dollars of price are moving back and forth within minutes. Some of this is just plain salesmanship – everyone trying to get the best possible deal for their team.
If a company only has one bidder, I believe it’s impossible to get the best possible deal. Many times, I’ve been across the table in a company sale where the other side was trying to convince us they had other bidders or targets. In many cases it was true, which had a big effect on our posture and positions. But in other cases, their assertions just didn’t ring true – the other side tried to make us believe, but ultimately didn’t pull it off. I have come to believe that in 99.9% of situations you cannot successfully convince a sophisticated buyer you have more than one bidder, if in fact you really don’t. (The 0.1% exception is the rare, true sociopath. These guys are so scary because they can lie effectively even to a very sophisticated audience. The only protection against them is the background check.)
Every company sales team needs negotiating strength. Maintaining multiple bidders for as long as possible is the best way to build and retain that strength.
Maximizing Business Valuation
The market to sell a company is both illiquid and inefficient. And no matter how perfect we’d like to think we are, all of us are susceptible to a professional sales effort. Each of us instinctively wants to get the best ‘deal’ we can in each transaction we are part of. We also want to close – it just feels bad to put a lot of work into a company sale or acquisition and not have it complete.
Having multiple bidders is the surest and fastest way to maximize business valuation. I’ve seen this work dozens of times from both sides of the table. Supply is always very limited in the market for selling companies. Often there is only ‘one’ like this for sale. There are almost always several potential buyers. In any market where there is only one for sale and there are multiple bidders the price will go up.
It’s impossible to maximize business valuation where there is only bidder, no matter how good the sales team is.
Company boards are elected by the shareholders to act in their best interests. Other than hiring and firing the CEO, a board’s most important work is during a change in ownership. This is a unique time for a board because it is their last job for the shareholders who elected them.
As every veteran director knows, it’s often easier to do the right thing than it is to be seen to be doing the right thing. Company sales are always complex transactions. No two situations are exactly the same. Managing the balance between the desires of the company management and the best interests of the shareholders is often an enormous challenge.
By far the easiest way for a board to know they have done the best possible job, and to show that they have done the best possible job, is to have multiple bidders. If there are three bidders offering to buy a company it’s easy to compare one against the other, and usually easy to select the best offer. If there is only one bidder, there is just no way to know the board has gotten the best deal for the shareholders – even if they really did.
Every successful company sale has to have multiple bidders for safety, predictability, maximization of business valuation and good governance.