What's the right business sale model for your company?
1. General Marketing / Negotiated Deal: This business sale model is when a business broker places ads on websites or does other types of general marketing in hopes of attracting strategic and financial buyers, who then call or email in response to ads. When a buyer is interested they will not move forward as part of an auction process with a deadline, but rather will submit a Letter of Intent (LOI) which will then be negotiated with the seller. This is most appropriate for businesses where it would be difficult to identify logical strategic buyers (usually more main-street type businesses - for example, a single-location restaurant or retail business).
2. Active Search / Negotiated Deal: Some businesses wouldn't likely be a good acquisition for a general buyer due to the specialized nature of the business. Other businesses with high confidentiality requirements may be so unique that it would be hard to create an accurate description of the business in an advertisement that wouldn't raise suspicions about the true identity of the business. Under such circumstances, general advertising may be inappropriate, and instead a business broker may conduct an active search for logical strategic buyers and for financial buyers with specific matching acquisition criteria. When using this business sale model there is not an auction with a deadline, rather buyers submit a LOI after they become comfortable with the business.
While the business broker strives to create competition for the business, the absence of an offer deadline may lower the probability of receiving multiple concurrent offers. Some business sellers assume that means this is not a good business sale model. However, many business buyers refuse to devote the time and energy necessary to participate in an auction, so a seller who is depending on an auction process could find that they don't receive ANY offers. An active search with a negotiated deal is more common for small and lower mid-market businesses than an auction.
3. General Marketing & Active Search / Negotiated Deal: This is the business sale model that Codiligent most often utilizes. It involves a combination of general marketing and an active search for logical strategic and financial buyers, culminating in a negotiated offer, rather than an auction process. The goal is to get multiple parties to move forward at roughly the same time to create competition but without the risk of having low participation in an auction. This business sale model will tend to be most productive in attracting a broader group of both financial and strategic buyers. While the broker will take great care to protect the confidentiality of the seller, if there is a reason why an unusually high level of confidentiality is required and the business is fairly unique and thus difficult to accurately describe without raising suspicions about its identity, this model may be uncomfortable for some sellers.
4. Active Search / Auction Process: This business sale model involves locating logical strategic buyers and financial buyers who have acquisition criteria that match the characteristics of the business, and then getting them to agree to participate in an auction where they are provided with information about the business and then are given a date by which they must submit their best offer. After receiving the bids the broker clarifies the deal terms and then helps the seller choose the one that best meets the seller's goals. This model can be effective for businesses for which a seller and their broker are confident there will be high demand (often because there are multiple parties who have previously made inquiries or let their interest be known, and there are other acquisitive industry buyers for whom the business would be an extremely good match).
For businesses that may not have as strong of demand, an auction can be problematic for the following reasons:
The timing may not be exactly right for the companies that would be ideal bidders (where even just one or two months later they would have the bandwidth to devote to an acquisition);
Some buyers refuse to participate in an auction because they are unwilling to devote the time and energy necessary to evaluate the business if they perceive themselves to be competing directly with multiple other buyers; and
Many of the best buyers are not anticipated by the seller and business broker - Axial Market suggests that 40%-45% of actual business buyers are not on a seller's top tier buyer list.
If you are working with a quality business broker or investment banker, they will help you determine which business sale model is best for meeting your exit objectives. If you are not already working with a business broker and would like to explore this further please contact Codiligent for a confidential consultation at: 888-324-5888.