Part 2: Going Once, Going Twice, Going Three Times -- Giving Sellers the Advantage
As investment bankers, we are unilaterally focused on helping our clients obtain the best possible price for their company, and one of the ways we do this is by keeping the advantage with the seller and preventing the buyer from controlling the process.
At Ravinia Capital, our approach favors using auctions to sell companies because it’s one of the most effective ways to maintain the authority right where we want it: in the hands of the seller.
Experience has shown that in today’s market, where an abundance of capital is pushing prices higher and private equity firms are flush with cash, buyers – to be the successful bidder -- will bid up the price on a company and then seek an exclusive agreement to tie up the deal.
That’s where we smell danger, the nexus at which leverage can shift from seller to buyer.
With an exclusive agreement in hand, a PE firm may use the diligence process to whittle down the price after they uncover problems, misstatements, or shortcomings with the company’s performance. Once the buyer starts to pick apart the transaction, the seller is in a quandary, and may face a lose-lose situation: either they are forced to agree to reduced terms to keep the deal alive or watch it flame out. Auctions help to prevent that scenario.
Another way we maintain leverage is by taking our deals to a broader, more competition-driven audience. Unlike the average investment bank that takes a deal to about 40 companies, with 100 considered a lot, we average over 1,000 points of distribution when we are selling a company. This gives us access to a huge network, including the possibility of reaching tail buyers -- sometimes more than one -- who may be willing to go to a higher price because of a unique value proposition they see in the company. Read our Rex Electric case study to see how that played to our client’s advantage.
We also use technology and efficiency to reach a broad audience. Investment banks typically distribute the CIM – confidential information memorandum – to their buyer’s list, followed by a management meeting with the top two or three bidders. We have added a step in the middle; we use a webcast that allows all potential buyers to hear, see, and question management. This broadens the number of potential buyers who can gain an in-depth understanding of the company, and perhaps attract interest from a suitor with an extraordinary interest.
By using all of these steps, leverage has remained with the seller for as long as possible, the broadest number of potential buyers have access to the deal, and the result is the best possible price for our client.
Write back and let me know what you think of our process.