Busting finance jargon with Roger Esler #3
Pre-emptives, limited auctions, wide auctions, twin track, triple track, sales agents, business brokers, spaghetti
There are many ways to manage a business sale processes depending on the specific attributes and qualities of a particular business, the nature of its buyer audience and the objectives of its shareholders. It is defining and managing the optimal process, with the right level of focus on most qualified buyers, that will contribute most to getting the best deal for shareholders and the best home for what can be a lifetime’s work.
Quality selling literature, rigorous preparation of supporting information, issue identification and resolution, creative deal structuring, empirical valuation advice and smart negotiation all play their part. But the starting point for a trade sale is tailoring the process.
To be very clear here, we are talking about confidential sale processes run by Corporate Finance Advisers where pre-determined strategic trade buyers are very purposely approached at a senior level, sign up to a confidentiality agreement and then receive a Sales Memorandum, before being asked to submit offers. At no point is the business’ profile shared in a public forum or through indiscriminate mass mailing.
There are of course “sales agents” or “business brokers” in the market that are suited to selling very small businesses that are relatively undifferentiated and where clear strategic buyers are hard to identify. They profile a business, put it on a “business for sale” website and distribute the profile widely, not only to companies across the industry but also to intermediaries, Corporate Finance Advisers and other web-based agencies, and even parade it on LinkedIn. An agent’s role is to mine out a buyer from somewhere, but up-front buyer research is minimal, little corporate finance advice is offered at any stage and confidentiality risks are very high. They often overpromise on value and are not shy about charging high fees for an approach that is essentially about chucking cooked spaghetti at a wall until some of it sticks.
The role of an experienced Corporate Finance Adviser is quite different and should initiate with an evaluation of shareholders’ options. Is there an identifiable international trade buyer audience with funds and a history of making acquisitions? Is the business suited to a private equity backed Management Buy-out (“MBO”) or even a flotation (“IPO”)? The adviser should able to “paint a picture” of each of these routes for shareholders, illustrating the value that would be delivered at completion and in the case of a MBO or IPO, further down the line. A clear Plan A that best meets shareholders’ objectives can then determined along with the tailored process by which it should be implemented, be that a “pre-emptive”, “limited auction” or “wide auction”.
Unsolicited or “pre-emptive” approaches from trade buyers are very common and can take shape over an extended courtship. Acquisitive corporates generally have well-tuned criteria and, in an economic environment where a clear, considered strategy is so important, there can be a preference to approach a target directly rather than wait for it to appear in the market through a competitive sale process. A pre-emptive process can produce an excellent result in the right circumstances: a premium “off market” price, a shorter timetable and no leakage of sensitive information to other parties. If the offer is not compelling, a wider process can ensue.
The decision as to whether to engage with such a pre-emptive party, or gently nudge one that is an evident consolidator with strong strategic fit, is a fundamental one. There needs to be conviction that this party will pay a price that justifies not marketing more widely. Critically, such dialogues must be supported with the right depth of information or any offer will be built on sand – exclusivity should never be granted on the back of an unsubstantiated, high level proposal. Preparing a full Sales Memorandum can be an effective way to both achieve this and evidence the willingness to market the business if a satisfactory offer is not forthcoming.
More competitive confidential business sale processes take the form of “limited” or “wide auctions” generally to an international audience. The distinction between the two is something of a continuum. A limited auction approach can focus on a short list of well-qualified, informed buyers and quickly establishing a two-way, interactive dialogue often with management presentations coming ahead of initial offers. Wider auctions can test a broader range of market participants, more lateral buyers and generally involve initial qualifying offers ahead of direct dialogue with the seller. Some education of buyers as to the business’ market and positioning therein, together with an exploration on both sides of the strategic fit, might be required in a wider process.
The intensity of concluding auction processes varies greatly with some being close run and others having an evident frontrunner. Ahead of granting exclusivity there is a need to evaluate very detailed wide-ranging terms, any earn-out metrics, working capital normalisation, derivation of share valuation, approach to due diligence, board approval processes and so on. All this gets captured in Heads of Terms and underpins deliverability.
Facilitating an exit through a MBO with private equity backing and/or debt funding is something entirely different to a trade sale, requiring management continuity (or evident succession), a 5-year growth plan as an autonomous business and often a rollover of equity value into the new structure. Occasionally trade buyers and private equity buyers are included in the same process, sometimes referred to as “twin tracking”. This might sound likely healthy competition but in practice requires very, very careful planning and choreography if it is not to fail altogether.
Trade buyers and private equity investors move at different speeds, require very different information, have different expectations of management and can deliver contrasting shareholder outcomes. In a private equity transaction, the “Bidco” deal structure can be every bit as important as the headline price. Vanilla twin tracking with a single Sales Memorandum and an effort to corral both populations around a common timetable, can risk confusion, alienation and a sub-optimal outcome.
A Corporate Finance Adviser should evaluate up-front whether there is a private equity investment case, how a deal structure would look and what it should deliver for shareholders, comparing that to the trade sale option. It is much better, therefore, to establish at the outset a Plan A preferred route and, if appropriate, a back-up Plan B, the latter to be implemented with information reshaped accordingly. This analysis can be enhanced with early, discrete market soundings and a more sequential and considered process be designed. The lazy circulation of a Sales Memorandum to private equity investors at the same time as trade buyers, without clarity as to what shareholders and management are trying to achieve beyond exit and price, is another example of spaghetti being thrown at the wall.
And “triple track”? Well, that is a twin track with an IPO being thrown in for good measure. Something or a rarity and, again, IPO is a complex option that should be properly evaluated at the outset.
A decision to realise value in a business should start with an appraisal of all the options by an experienced Corporate Finance Adviser to determine the best route, alongside guidance on the optimal timing, planning considerations and the precise, tailored sale process and related documentation to maximise that value. Focus, concentration of effort and face time with the right buyers can then create a superior context for selling, negotiating and optimising both price and deal structure.
Quality over quantity, and strictly no spaghetti.