Negotiated deals, in which 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 a negotiated deal can make sense for companies looking to sell.
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.
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.
Sellers usually obtain similar prices whether through auctions or proprietary deals. It’s typically not true that proprietary buyers will lowball 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.
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.
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.
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 is 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. In today’s markets, no one is able to steal a company. A negotiated or proprietary deal may well be the best approach.
Bassem Mansour is co-founder and co-CEO at Resilience Capital Partners.