When a buyer appears, the negotiation begins. Or perhaps a process should begin.
Many company sales begin in the same way: a competitor, industrial group or investor contacts the shareholders directly and expresses an interest in acquiring the business.
The approach is specific. The potential buyer knows the sector. There appears to be an opportunity. Sometimes an offer follows quickly.
For an owner who has never seriously considered selling, the possibility may be sufficiently attractive to begin a bilateral negotiation.
But one question should be asked before proceeding: how do we know this is the best offer the market would be prepared to make?
This is where an important distinction arises between responding to a direct approach and running a structured sell-side process.
A bilateral negotiation normally has one buyer and one seller. A competitive process seeks to create interest among several potential buyers while preserving confidentiality and establishing common rules, information and a timetable.
That difference can materially change the negotiating dynamic.
The problem with negotiating when there is only one alternative
When there is only one potential buyer, there is also an imbalance.
The buyer knows that it is alone at the table. It can analyse the company, test the limits of the negotiation and influence the timetable without fearing that another party will secure the opportunity.
For the seller, walking away often means returning to the starting point.
This becomes particularly relevant after several months of work, meetings, information sharing and due diligence. The more advanced the process, the greater the psychological and economic difficulty of stepping back may become.
The price initially presented may not be the final price either.
A high indicative offer may be reduced during due diligence through adjustments to EBITDA, identified debt, working-capital requirements or risks uncovered in the review.
Without credible alternatives, the seller's ability to resist those changes is naturally weaker.
Competition also exists in the market for companies
A company is worth what a buyer is prepared to pay, but different buyers may attribute different values to it.
- a competitor may identify cost synergies;
- an international group may value immediate entry into a new market;
- a financial investor may see potential for growth, consolidation or international expansion;
- a supplier or customer may consider the company's integration into its value chain strategically important.
The same company can therefore support very different acquisition rationales.
That is precisely why identifying the right universe of potential buyers is one of the most important tasks in an M&A process: the best buyer is not necessarily the most obvious one.
A competitive process is not only about increasing the price
It is natural to associate competition between buyers with the possibility of achieving a higher valuation, but price is only one component of an offer.
Other terms may have an equally significant economic impact: the percentage paid at closing, deferred payments, earn-outs, warranties required from the sellers, continued involvement of shareholders in management, reinvestment of part of the proceeds, exclusivity, conditions precedent and the expected timetable to completion.
Two offers with the same headline price may produce very different outcomes for the shareholders.
A competitive process makes it possible to compare the terms as a whole.
The offer with the highest nominal value may, for example, depend heavily on future targets, while a slightly lower offer may allow a substantially larger proportion to be received at completion.
The decision should consider risk, liquidity and the sellers' objectives, not only the number on the first page of the offer.
Creating competition without creating noise
A competitive process does not mean putting a company up for sale publicly. Quite the opposite, confidentiality is critical in many transactions, particularly those involving SMEs. Customers, employees, suppliers and competitors should not learn prematurely of a potential transaction.
A process can be structured in several stages. Potential buyers are first identified and approached without disclosing the company's identity. Additional information is shared only after interest has been confirmed and a confidentiality agreement signed.
Access to more sensitive information can be reserved for later stages and a limited number of candidates.
The objective is not to contact as many companies as possible, but to contact the right investors.
The timetable also creates value
An organised process makes it possible to establish a common timetable.
Potential buyers know when they should express interest, when they will receive information, when indicative offers are due and when they must submit their best terms.
This discipline has two advantages: it allows offers to be compared at a similar point in time and prevents a potential buyer from extending the process indefinitely while obtaining increasing amounts of information about the company.
In M&A, time and information are negotiating tools, and managing both correctly can be as important as negotiating the multiple.
Does that mean a direct approach should be rejected?
No. A direct approach may represent an excellent opportunity.
In some cases, the buyer may have such a strong strategic rationale that it can offer particularly attractive terms. There are also circumstances in which confidentiality, speed or the shareholders' specific situation justify a bilateral negotiation.
The important point is to distinguish a good offer from an offer that has simply never been compared.
When a buyer shows genuine interest, the shareholders have an opportunity to assess the market.
They may decide to negotiate directly, discreetly test interest from other potential parties or structure a more competitive process. The right choice depends on the circumstances.
Better negotiation begins with alternatives
One of the simplest rules of any negotiation also applies to the sale of a company: alternatives improve the negotiating position.
In a well-structured sell-side process, the objective is not simply to find someone willing to buy.
It is to identify who can attribute the greatest value to the business, create sufficient competitive tension and convert that interest into the best possible terms for the shareholders.
Fenix Capital Partners supports shareholders throughout this process, from company preparation and valuation to investor identification, market approach, negotiation and completion.
Finding a buyer is important. Knowing whether we have found the right buyer is a different question.