By David Mead
Reprinted with permission from Issues for Growth
Doing a sale with only one prospective buyer is typically a bad idea. Recently, there have been a number of failed sales transactions where the seller negotiated with only one prospective buyer only to have the deal fall apart, or to have the sales price significantly lowered during due diligence.
Here are a few comments from disillusioned sellers:
- “We received an unsolicited offer for our business. The process wore on for more than nine months. Then the buyer just withdrew the offer and disappeared.”
- “We were planning to start a process, but had a pre-emptive offer. Due diligence with the buyer dragged on and the price was adjusted several times. While we went ahead with the sale, when it was all said and done, we realized that the price we got was significantly lower than market. We obviously left money on the table.”
- “I was tired. The last few years had been a grind. When I got an offer for the business, it seemed like my way out. What was presented as a fast track to close, became an ordeal. After a long process, I was worn out and wound up with a large amount of the price dependent on future earnings.”
- “We received an offer to sell our business to a large competitor in our industry, orchestrated by one of our Board members. The sales process took over a year to finally get done. By the time the sale was completed, the competitor knew so much about our business that I felt we had no choice but to sell.”
While there are some sales transactions with one buyer that have been successful, there are many stories of disillusioned sellers. Here are some of the reasons not to conduct a sale with only one prospective buyer:
- No price or terms competition. Competitive bidding will help reassure the seller that they are receiving the market value.
- No opportunity to engage an outlier. In a competitive bidding process, a buyer often emerges from outside the industry or with a different business model or value proposition which enables them to offer a significantly higher price than the usual suspects.
- No control over the process or timetable. With only one buyer, the seller has no leverage to move the process along. Time is the enemy of most transactions. Buyers may wait to see how risk factors play out over time. Buyers can have unreasonable demands for due diligence. Company performance may suffer.
Fundamentally, it’s a question of leverage. Some may call it “keeping the buyers honest.” Having competitive offers – even if there are only two offers – provides an alternative that can ensure that the process keeps moving and generally provides greater value for the seller.
(originally published in the October 2013 eNewsletter)
David Mead is President/CEO of The Mead Consulting Group. The 40-consultant firm, www.MeadConsultingGroup.com, based in Denver, specializes in working with CEOs and owners of small and mid-sized companies to help them create value and leverage business strengths to reach the next level of success: growth, improving cash flow, and maximizing value for exit. Contact Dave at (303) 660-8135.