Creating Heat: Competitive tension in an exit

Having multiple keen bidders is M&A gold - here's how to get it and some pitfalls.

This the number one piece of advice when selling your business:

πŸ’‘
To get the best price and terms, you need more than one potential buyer.

Of course this is somewhat obvious – this principle applies to selling any asset.

In the M&A industry, we call this Competitive Tension.

Let's explore how this works in an exit setting, how to get the 'heat' going and how to avoid overplaying your hand.

How competition works

You need buyers to feel the fear of competition from other buyers. You are a prized asset that will take a healthy bid to win.

When they feel that fear, buyers make you a strong offer up-front on fair terms. They won't mess around with low-ball offers that waste your time. They move quickly, with urgency. Senior people will focus on the deal to make decisions promptly. They will focus their due diligence on key areas without wasting time.

It creates this a sort of 'lubrication' that keeps the deal moving forward smoothly. And if you keep this tension throughout negotiations, you can leverage it repeatedly.

They want to push most of the price into an earnout? Or make you stay on for five years after the deal, with penalties for leaving? Or have a six-month window for due diligence?

In all cases, you can calmly explain that if they don't come through with the terms you want, you can just get those terms from another keen buyer in the pool.

Your BATNA (alternative to doing a deal with them) is strong.

A no-competition deal

To emphasise the point, it's worth pausing on the inverse situation – where you have a single buyer who knows there aren't other credible buyers around.

They can start with a low-ball offer, take their time, get distracted by other projects and take unreasonable positions on other terms... and they know you have no alternative.

Buyers love it when they get an uncontested deal with no other buyers. All the cards are stacked in their favour, and against you.

How to get competitive tension

Simply, you need to put in the work to find and engage potential buyers. It's a sales process, where you need many 'leads' at the top of your funnel to end up with multiple highly-interested buyers.

We've written extensively on how to find buyers on Bizma. Here are some places to start:

πŸ‘‰ A 7-step plan to finding buyers for your business
πŸ‘‰ How to build relationships with potential buyers
πŸ‘‰ How to cold pitch a potential buyer

If you are able to get multiple parties interested, there are two paths for how you manage them through the offer process.

Auction

This is the most obviously competitive process.

You tell all parties that you are running an auction process, with bidders formally invited into a process with deadlines for first round, second round and final bids. You are really taking the lead, and forcing them through your timeline and process. 

This is best suited when you have a very large number of potential buyers and have the confidence that they will go through an auction. M&A Advisors are almost essential if you take this route as managing an auction is a LOT of work.

Bilateral

This is where you don't run an auction, but you negotiate directly with multiple bidders in parallel.

This is less formal and less structured, and perhaps best suited if you have a smaller pool bidders. The skill here is keeping them running to similar timelines for offers, and making sure they are all aware that other buyers are interested.

Taking it too far

Competition is great, but you can overplay your hand.

Buyers don't like being pitted against others, and this can drive them to act more aggressively or to just walk away if they feel the deal is too hot.

So you want to find a balance between showing there's competition and making them think the deal is so competitive that it will be too hard to get done.

You can also spend too much energy creating competitive tension, and lose out on genuine engagement with the most likely buyers.

Experienced M&A advisors can help you balance these factors and set the right tone with buyers.

Pushback from buyers

When you have a highly competitive deal, you should expect buyers to push back and force the dynamics in their favour. That's actually a good sign - it means they are really keen on the deal!

Here are some things you could expect:

  • Simply, some buyers will refuse to engage in an auction and walk away entirely unless you deal only with them. A softer approach is to pitch you on an exclusive window where you can only deal with them, promising a faster and smoother process. It's usually not wise to accept that.
  • Buyers may make "exploding" offers, with a short deadline after which the offer expires. They want to cut through your deadlines, and pressure you into making a quick decision.
  • Alternatively, a power play is to ignore your deadline and deliberately make offers late. 
  • Buyers may attempt to create doubt about the credibility of other buyers, suggesting that they aren't serious, and might make a high offer but with a low chance of following through. Or that other buyers are notorious for mistreating founders after acquisitions!

Again, a good M&A advisor will have seen all of these tactics before and will help you to resist them.

Just don't sell

Lastly, there's another powerful force that can work to your advantage.

It's not competitive with another buyer, but competition with not selling at all.

If you can convince the buyer that you are happy running the business, that you are bullish about the future and that you are happy to consider a sale in five years' time... that has all of the benefits of another keen bidder. They will need to make a strong bid and not waste your time if they want to get the deal done.

Some people call this, rather out-datedly, playing the reluctant bride. 

Ideally you want this, plus multiple bidders too!

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