THE SALE PROCESS WITH PREFERRED BUYER
– Sergio Garcia del Bosque, Executive Director, Seale & Associates
Once the decision to sell a business is made, it is very common for entrepreneurs and business managers to ask themselves what type of process is the right one for the sale of their business. In this short article I will try to explain one of the most frequently used options: “The process of Sale with Preferred Buyer”.
I list two variants of this process along with their advantages and disadvantages:
Option 1: Preferred Process with Unique Participant
In this process a single potential buyer is selected, and it is explained that they must behave under certain parameters in the process if they want to negotiate the transaction exclusively (without involving other buyers). To carry out this process it is necessary to clearly understand the value of the company and the expectations of the Shareholders. It is very important to clearly communicate this information to the potential buyer.
Advantages: direct work with the strategic partner with more synergies, financial capacity, confirmed interest, faster process, more collaborative and with less confrontation.
Disadvantages: lower leverage to negotiate and the inability to know if the best value and terms are obtained compared with other potential strategic partners.
Option 2: Preferential Process with Two Participants
In this process, two potential buyers are selected, and it is explained that they must behave under certain parameters if they want to negotiate the transaction successfully. They are also told to each one that they have competence and that they should present their best positions in the shortest possible time. To carry out this process it is necessary to clearly understand the value of the company as well as the expectations of Shareholders and communicate them very clearly to potential buyers. It is also important to share with the potential buyers that the expectation of the shareholders is a minimum floor but does not guarantee them to close the transaction since their competitor in the process could exceed those expectations.
Advantages: direct work with two financially capable and highly strategic partners, better leverage to negotiate and increase flexibility and options by having more than one participant.
Disadvantages: greater confrontation, longer process, greater involvement of the Administration, increased exposure of sensitive financial and operational information, as well as an increased risk of leakage of confidential information.
I include a brief flow diagram of the process:
Successful Execution of the Sale Process with Preferred Buyer
Successfully closing an operation with a Preferred Buyer at a value with reward and favorable terms requires:
- Presentation of a solid initial banker to define objectives and expectations; provide detailed business information and adjusted financial statements; and provide guidance in valuation.
- Aggressive timeline with firm dates that must be met by the Preferred Buyer.
- Real belief of the existence of alternative strategic buyers and that the shareholders will not hesitate to stop the process with the Preferred Buyer in case of any deviation of the value, time or terms of the transaction.
- An experienced and reliable advisor to navigate through the process and ensure that the right pressure (time and value) is uniformly applied.