Source: Kateri Zhu
One of the single most challenging aspects of selling a business is getting your buyer pool right. While you certainly want to include enough buyers to complete the transaction, you also want to avoid sharing proprietary company information with more people than necessary. How do you balance the drawbacks of running a broad process with the benefits of having enough high quality buyers involved?
Theoretically, it would seem prudent to keep your buyer pool tight. Historically, sell-side bankers would frequently brainstorm a long buyer list and then trim the pool down to a handful that they believe to be the most likely acquirers. The only buyers invited to the bidding process would ultimately end up being those on that shortlist.
However, evidence shows that unless you have a compelling reason you should go broad, broad, broad.
First, despite what many may believe, it’s often an unexpected buyer that ends up being a game changer. Joe May, Managing Principal at Graham Partners and Axial Member, explains that “bankers will sell an asset to someone in their top tier of buyers 55% to 60% of the time. That means that 40% to 45% of the time, the buyer is going to come from outside the top tier.”
This demonstrates that even for bankers with decades of execution experience, it’s exceptionally difficult to accurately identify the most likely buyers.
Moreover, casting a wide net aligns with a sell-side investment banker’s obligation to maximize value for their client. All else equal, more buyers translate to a more competitive process, and competitive deals beget more competitive pricing.
Similarly, the same principle applies to capital providers selling a portfolio company. The vast majority of fund managers are measured by the internal rate of return and cash on cash returns that they produce on their investments.
While there are privacy, resource, and process considerations that come with broad deals, the higher your sale price the stronger your IRR, and the stronger your buyer list, the better your chances of ultimately securing a robust sale price. Adds May, “in order to maximize value for our investors, we typically go a bit broader.” At the end of the day it’s truly a numbers game.
Concludes Adam Abramowitz, Senior Vice President at Intrepid Investment Bankers, “as much as you might think you know who the likely buyers are, until you pick up the phone and talk to a decision maker, you never know for sure.” The one consistent way to mitigate the amount of money you leave on the table is to cast a wide net and start broad.
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