April 26, 2016
Why a Traditional Auction can do More Harm Than Good for the Private and Closely-held Business Owner
What the business brokers don’t tell you
Time and time again I hear from middle market business owners who assume a full-blown auction is essential for them to maximize value in a sale. To them, as to the many companies occupying the lower end of the middle market who hold this same view, I say: think again.
It’s true that the broad auction is the path frequently taken by public companies, where a board’s desire to demonstrate fiduciary responsibility calls for complete transparency and a full market inquiry. But is this method of sale also best for the private and family business owner? Most often, no! Let me share with you why.
Many brokers and investment bankers say the widespread auction is the only way to get top price, but we believe this approach is ill advised for the lower middle market business and can actually do harm. Everyone wishes to get full value for the company they have built, but at the same time you should be equally concerned that you not damage or impair the viability of the business along the way.
In spite of what many brokers may tell you, the fact is, there is always a chance that you may not be successful in selling your company after going through a process. If that happens, the last thing you want is to be left with damaged goods, but that is exactly what can result from a traditional auction.
Fortunately, there is an alternative path that generates the competition necessary to maximize value but runs less of a risk of threatening the company. This process is more efficient and precise, and places a greater emphasis on confidentiality and certainty of closing. I refer to it as the Discriminating Sale Process.
The Discriminating Sales Process utilizes a rifle, rather than a shotgun, approach to marketing your company for sale. The side-effect of “flogging” a company in the open market is to unnecessarily raise concerns among customers and vendors, and alert competitors and employees of a potential change. Competitors use these rumors against you, or worse yet, if they receive a pitch book, use the information contained therein to create a competitive advantage for themselves.
No matter how loyal your employees, if they see a transition coming it understandably raises concerns and you run the risk of losing good people. It’s true that many buyers must cut costs to justify the price they pay and often that comes in the form of staff eliminations. Your more sophisticated employees know many buyers will eliminate positions to justify the price being paid and they may look to get ahead of the cuts by leaving on their own terms.
Despite these real concerns, many brokers actually use SIC codes to identify potential buyers, casting as wide a net as possible. Fifty, sixty or more books go out in their attempt to sell the company. They call it being comprehensive – I call it being lazy. If you send out that many solicitations, the broker has probably not done their homework.
The practical fact is, there are probably no more than a dozen ideal suitors for your company when all factors are taken into account. When you consider geographic footprints, product lines, specialties, financial capacity and culture (the most overlooked of all variables), the list of ideal buyers becomes far shorter. Why would you want to share information with a third party who in reality is not a likely suitor? You don’t! So what exactly is the best course?
The Discriminating Sale Process
Take all considerations into account and with the guidance of your advisor truly examine each prospective suitor utilizing a system of filters. Ask which buyers will truly be interested, can get the deal done and are viable successors of your legacy. These are the only parties that should be approached.
No prospective buyer should be contacted without your knowledge and permission. Do not give your advisor complete discretion. You know more about the industry landscape than they do – period.
Contact suitors at the CEO or owner level only. We first describe the opportunity generically and then, only after confirming a high level of interest and executing a confidentiality agreement, do we share the name of the company or any detailed information.
Generate competition and maximize value by understanding the attractiveness of the business to each individual suitor, making them aware of the benefits of a combination, and providing them with the right information to arrive at their maximum value.
Working with a smaller number of prospective buyers, you run less of a risk of word getting out and you can still create a horse race to maximize the value you receive for the company. This more selective method actually benefits both sides. Even the buyers appreciate it. The suitors know they are amongst a select few and their time will be well spent. You, in turn, have the confidence those approached are real buyers before having to reveal any confidential data. And, your dialogue is only with those at the top of those companies.
At the end of the day, we know our primary mission is to obtain maximum value for our clients. But part of that responsibility includes protecting the companies we serve by not eroding value through a widespread auction. We subscribe to the medical adage, first do no harm. Identifying the real viable suitors and then moving in short order to the few most interested parties is the goal of the Discriminating Sales Process and can be accomplished through efficient exchange of information, earnest conversation and early discussions on value.
Bulkley Capital has followed this strategy for almost thirty years – it has stood the test of time and we know it works. Moreover, it has enabled us to create excellent results for our clients without putting them at undue risk. So if you are considering a sale of your business and are told you need to cast a wide net utilizing a broad auction process, stop and consider the implications. I think what you will conclude is that the Discriminating Sale Process is the best path for the middle market private company.
Brad Bulkley is President & Founder of Bulkley Capital, an M&A advisory firm based in Dallas and focused on family-owned and other privately held, middle market businesses nationwide.