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An Argument Against Competitive Sales Processes

It’s almost a truism that the way to sell a company is to run a competitive process.  It’s a big part of the basis for hiring investment bankers.   A multiple buyer process is a lot more work and a lot more complex.  Most corporate development teams don’t have the resources to run these kinds of processes.  This is not to minimize the value that bankers bring.  They have a pulse on the market.  The know the buyer universe.  They have extensive experience negotiating.  All that said, they are perhaps less incentivized by the internal costs and resources required by a multi-buyer sale process (more diligence meetings, more questions, more legal resources, etc.).

There are some situations where a competitive process doesn’t optimize outcomes particularly for a corporate seller.  Here are a few [signals] that you may want to consider a single buyer process:

  • Sub-scale assets.  The purchase price under any scenario will be a rounding error for the company.  And is often dwarfed by the non-financial costs of the process that you want to minimize.
  • You have a clear sense of value.  The competitive process is a price discovery mechanism but if you have a sense of what you will get for the asset, the competition doesn’t add nearly as much value.
  • Distraction cost is high.  The teams and resources required in the competitive process are in high demand in your organization.  This could be a corporate development team stretched thin on bigger buy-side deals.  It could be the parent business unit that is aggressively pursuing growth initiatives.
  • Bird in the hand.  If you have a natural and excited buyer, a competitive process may dissuade them from moving quickly and putting heavy resources behind the deal or even scare them away entirely.
  • Non-price requirements.  If you have requirements from a sale other than maximizing price, you may find them easier to negotiate with a single motivated buyer.  These could include retaining access to IP, retaining revenue from reseller relationships, non-competes blocking your competitors from getting access to assets or special treatment for your customers or departing employees.

1:1 sales processes are certainly the exception not the rule, but it’s good to ask the question when divesting an asset.  What do I get by running a competitive process and does it outweigh the extra effort and resources?