Part of the life cycle of a business is a change in ownership, when an owner or founder sells his or her business. There are many motivations for owners to sell their business interests, among them:
- Business Distress – When a company faces liquidity issues and cannot access capital through financing activities, an owner may need to liquidate.
- Succession or Lack of Succession Planning – Some aging owners have plans to transition their companies to family members, while others may lack a succession plan.
- Strategic Opportunities – A strategic buyer may present a competitive advantage by leveraging either the buyer or seller’s market reach, technology, or reduced competition.
- Cashing Out – Selling can be an opportunity for an owner of a private or illiquid company to monetize much of their net worth, which is often tied up in the business.
Given the variety of reasons an owner might wish to sell a business, there are likewise several approaches to running a “marketing process.” Usually structured as an auction, a sell-side marketing process is the phrase investment bankers or transaction advisory professionals use to describe how they sell a business.
The sell-side process describes the method by which a business owner engages with a transaction advisor, or intermediary, to sell his or her business interests to the “buy side,” or buyer. Ultimately, a seller can structure this process in one of four ways: broad auction, limited auction, targeted auction or exclusive negotiation.
Broad Auction
In a broad auction, an investment banker will take steps to prepare the business with buttoned-up historical financials, projections, and marketing materials that paint a full picture of the company and then invite hundreds—sometimes thousands—of buyers to bid against each other. The selling company’s identity is kept anonymous until a serious potential purchaser signs a nondisclosure agreement (NDA), and the seller maintains maximum leverage to negotiate better value, terms, and timeline in his or her best interest.
Limited Auction
The number of potential buyers is often limited to mostly strategic buyers (usually fifty or fewer) who have the greatest likelihood for synergies and natural growth opportunities aligned with the sell-side target company. The process run is largely the same as a broad auction; however, the number of financial buyers (such as private equity companies) included is limited for expediency or reasons of confidentiality.
Targeted Solicitation
When a company is very large, there may only be a small number of potential buyers. The investment banking representative will solicit the interest of those buyers directly, typically only focusing on highly qualified strategic purchasers in the industry. This approach is most likely to help large companies maintain confidentiality but still allow for a formal sell-side marketing process to retain leverage for the seller.
Exclusive Negotiation
When a seller opts to only negotiate with one single potential buyer, the process is not a true auction and can result in a substantial loss of leverage for the seller. Owners typically engage in an exclusive negotiation when they have received unsolicited contact from an interested buyer and do not have a plan in place or are not familiar with the other sell-side auction methods. Confidentiality can be achieved, but the value of the enterprise is not maximized, and leverage is often lost.
M&A transaction advisors’ interests are aligned with sellers and typically earn a success-based commission upon closing a favorable transaction for their client. By carefully considering the optimal strategic approach, a transaction advisor can maximize the value of the business and greatly improve the terms for the selling owner.
The type of sell-side process chosen may depend on the reasons for which an owner might wish to sell. However, the value of working with a sell-side transaction advisor lies in their relationships, retained leverage, transaction experience, and, ultimately, the value of the sell-side process.
