The Business Selling Process – How Many Potential Buyers Should You Approach?

Once you have decided to sell your business, the next big decision lies in “how” to sell your business. For most entrepreneurial-led, and/or privately-owned businesses, taking a “do-it-yourself” approach by negotiating directly with a single buyer rarely results in a positive outcome (unless it is under some very specific circumstances - see DIY pros and cons). By interviewing several M&A Advisors, it will become clear that it matters a lot about the type of sale process you choose to pursue. This blog article will highlight some of the key issues sellers should consider, once the decision to sell the business has been made.

First, let’s outline some the sale process options you will need to consider.  While everyone’s definitions of 1) a negotiated sale, 2) a narrow process, and 3) a broad auction process will differ slightly, we like to think of the number of potential buyers for each as, a “handful” for a negotiated sale, perhaps 20-50 in a narrow process, and perhaps 300 or more in a broad auction process. While all three approaches differ, they all include at least some level of competitive tension amongst buyers.

Choosing the right approach starts with gaining a clear understanding of the seller’s objectives and priorities.  There is a lot to consider.  For a quick review of the key questions we ask before recommending a process, see our seller’s priorities questionnaire.

Best buyer vs highest price
The best buyer may not be willing or able to pay the highest price.  Most business owners know some of the best potential buyers for their business, based on their viewpoint on the best strategic fit. This could be based on the buyers’ complimentary products, services, customers, markets served, etc.  If selling to the “perceived” best buyer is a higher priority than obtaining the best value, then a narrower, or even a negotiated sale process should be considered.  A broad auction, however, can uncover high-quality buyers never previously considered; some may be willing to pay top dollar and could be an excellent strategic fit.  It is amazing how many M&A deals are completed with an unexpected buyer.  The reality is that it is very difficult to gain detailed insight into what motivates a buyer to pursue an acquisition unless you allow them to articulate their strategy in a confidential dialogue.

Confidentiality
Maintaining confidentiality from the outset through to close is paramount to ensure employees, customers, and suppliers don’t defect and create obstacles to correct if a deal doesn’t close.  When competitors become aware of a potential sale, they can try to take advantage of the market uncertainty that arises from the M&A process as well.  No NDA is foolproof, and logic would dictate that the risk of a confidentiality breach is higher with a broad auction process than with a negotiated sale. Before deciding on what type of process to pursue, the sensitivity of the business to a confidentiality breach with each of its important stakeholders should be considered.  Some processes are defined as broad because a lot of Private Equity Groups (PEGs) and/or financial-type buyers are included.  A confidentiality breach by a financial buyer is typically less impactful than a breach by another industry participant.  Therefore, it is not only the type of process that should be considered but also the make-up of financial vs strategic buyers that are included in the process.

It is also much easier to stagger customized and/or sensitive information flow to potential buyers in a negotiated sale and a narrow process than it is in a broad auction process.

Speed
If closing a deal quickly is a high priority, sometimes it may best to focus on a handful of the best buyers and open a confidential dialogue.  However, under some circumstances, this can backfire.  Large buyers, such as publicly traded companies, often move at a “snail’s pace” when it comes to M&A (unless it is an opportunity identified and pursued by the executive team or board).

A narrow or broad auction process usually involves a two-step bidding process.  Potential buyers are provided an opportunity to provide an initial bid, which can lead to further discussions with a subset of the best initial candidates, who then may get an opportunity to submit a more detailed Letter of Intent (LOI).  As such, the marketing material, data room, and preliminary Q&A sessions must all be completed before the real negotiations begin, which can add time to the process when compared to a negotiated sale.

Flexibility
Sometimes business sellers don’t know what they want but will know it when they see it.  In this case, the M&A Advisor’s role is to focus on creating options for the seller to consider.  This usually means going out to a broader market that includes financial buyers, foreign entities, companies in adjacent industries, etc. Flexibility on the type of deal structure, equity rolls, sale or retention of assets such as real estate, transition periods, etc. can drive value and open up opportunities for the seller that were never considered at the onset of the process.

This is often the recommended approach for highly marketable businesses, that are well-run, and are anticipated to capture high valuations from the market.  If the business and the seller's flexibility are conducive to a PEG recap (see here for desirable criteria), a broad auction process should be seriously considered.

Of course, like everything in M&A, the choices you need to make can’t be simplified down to a blog article.  The key is to look for an M&A Advisor that will listen carefully to you and your objectives and guide you to the right process for your situation. That means working diligently to understand your business, your market, and discover potential buyers' motivations, etc. to design the best process for your situation.

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