Negotiated deals

Fri, 16 Nov 2018 02:01:09 Z

Negotiated deals – where an owner sells a business without going through an auction – have an undeserved reputation for generating lower prices. Superficially, it makes sense that sellers would get better value if there are multiple prospective buyers. Yet, negotiated or proprietary deals often can be a far more effective and efficient way of selling a company without sacrificing net returns.

Here are five reasons why a negotiated deal can make sense for companies looking to sell themselves.

1. When time is of the essence, negotiated deals close faster. The streamlined process of negotiated deals means they can close much faster than those sold through auction, avoiding extensive duplicative due diligence by prospective bidders. Negotiated deals by definition involve buyers and sellers who are on the same page from the beginning, making the transaction process much smoother.
2. Underperforming or distressed companies can find more flexible buyers through negotiated deals. While auctions may make sense for companies with superior profiles, underperforming companies or those that have business challenges (temporary or systemic) might benefit from selling to a buyer who is willing to work through those issues. Proprietary buyers tend to be more flexible in negotiations than auction buyers who prefer to buy problem-free properties.
3. Sellers usually obtain similar prices whether through auctions or proprietary deals. It’s typically not true that proprietary buyers will low-ball sellers. In a world in which information about companies, their markets and their business prospects is readily available, valuations increasingly are transparent and efficient. Accordingly, buyers and sellers alike have a realistic understanding of what a company is worth. In many cases, buyers are incented to pay a fair price to avoid the competitive process. Even in a negotiated transaction, most sellers will retain an investment banker to help streamline the process and keep buyers honest through the threat of an auction.
4. Buyers of proprietary deals usually know exactly what they want. These deals result in less wasted time and expense and a greater likelihood of success. Acquirers in such transactions typically have predetermined boundaries in everything from the type of industry to potential deal-breakers to financial metrics such as revenue or EBITDA, meaning that fishing expeditions are rare and only serious deals are pursued.
5. The proprietary deal process is less disruptive. An auction process can be highly unsettling. For one thing, it entails releasing large volumes of financial and operational information. Depending on the type of process, confidentiality clauses notwithstanding, sellers may need to be concerned with competitive elements, as well as distractions to employees, customers and business partners. All of which may introduce significant uncertainty about the company’s future. This isn’t the case with all sale processes, but all risks should be considered.

If negotiated deals make so much sense, then why are they comparatively rare? Put simply, excessive seller expectations. Owners of companies frequently have an outsized view of their value. Proprietary buyers are usually the first in the door, and they are the ones who deliver the news about a company’s value. If the price is too low, the owner may pursue an auction. Often enough, they realize that the original offer was close to the mark, especially when all risks and costs are factored into the price.

By that point, however, the time and expense associated with launching into an auction process are so great that they may continue down that path rather than restarting the alternative. They would have done much better to approach a sale with more realistic expectations to begin with, realizing that — in today’s markets — no one is able to steal a company, and that a negotiated or proprietary deal may well be the best approach for them.

Bassem Mansour is co-founder and co-CEO at Resilience Capital Partners. He is involved in all aspects of the firm’s operations, including investment decisions, portfolio company oversight and investor relations. He is a member of the Cleveland Chapter of Young Presidents Organization, as well as several professional organizations and is a frequent speaker on private equity and distressed investing.

PE firm co-CEO advises clients to leave a little growth for the next owner

What’s your exit strategy?

Fri, 13 Apr 2018 22:22:34 Z

You’ve built your business for decades and are ready to retire. Maybe you’ve struck gold unexpectedly and want to cash in. Or, you’re the head of a family company, but your children aren’t interested in taking over. Whatever your reason, you’re considering selling or merging your company as a way to exit. What are the top seven questions you should ask yourself before making the decision?

1. Is my company in good order?

Inadequate management practices can make a company unattractive. Premium buyers do not want to pay for the privilege of cleaning up someone else’s mess. Uncollected accounts receivable, inaccurate inventory and poor financial recordkeeping also make it harder to value and market a company.

2. Who is my target — a buyer or a merger partner?

Are you open to merging with a strategic acquirer or a competitor; or selling to a private equity firm? Each of these affects the structure of the transaction, the company’s valuation, the associated risks and the approach to the deal. Identifying the target and your flexibility early on narrows the decision tree and makes the whole process easier.

3. Do I know what my company is really worth?

Emotional attachments, lack of market knowledge and other factors can skew your perspective on your company’s value. A business valuation specialist can help determine the right merger terms, which can maximize your return while also ensuring a faster transaction.

4. Am I willing to leave money on the table?

A fatal flaw of many entrepreneurs is trying to time the market. Market timing is for Wall Street traders, not middle-market business owners. Companies generate higher M&A multiples when the other side believes more growth is possible. It’s better to be willing to close the deal, even if you have not made the last nickel out of a company.

5. Can I be flexible on financing?

Increasingly, merger partners as well as buyers are asking for assistance with financing, including help with arranging loans, alternative types of collateral and seller financing for part or all of the price. If you can afford it and put in safeguards, seller financing can attract buyers who otherwise might be shut out. In a low-interest rate environment, seller financing can be attractive to a seller if the appropriate protections are afforded, when compared with the alternative market rates of return for cash proceeds.

6. Who will market my company?

Building a company and merging it are two different animals, if only because emotional attachments can make it difficult to maintain perspective. It’s often better to bring in professional advisers to market a company. Besides, investment bankers not only can find buyers, they also can generate better terms.

7. Am I willing to work for the buyer?

Many people become entrepreneurs because they want to work for themselves. It can be hard for them to work for someone else at a business they once owned by themselves — especially if it is a forced deal or a merger with a competitor. Yet a willingness to work during the transition can make the difference. Some private equity managers, for instance, won’t consider a company if the owner plans to walk out the door after the transaction.

Bassem Mansour is co-founder and co-CEO at Resilience Capital Partners. He is involved in all aspects of the firm's operations, including investment decisions, portfolio company oversight and investor relations. He is a member of the Cleveland Chapter of Young Presidents Organization, as well as several professional organizations and is a frequent speaker on private equity and distressed investing.

Smart Business Dealmakers

Negotiated deals

What’s your exit strategy?