How Valuable Is A Competitive Process?

18 Jul

By Huxley Nixon

When buying a new car do you pay the “Suggested Retail Price” of the dealer?  If so, you NEED to read the actual case study for my new business – the M&A MARKETPLACE by CHC℠ or you may pay 10 to 30 percent more than you should.  I assume most of us would shop several online and/or offline sources before making a major capital decision in an effort to achieve the peace-of-mind that we received a fair deal.  Then WHY do so many business owners of private companies end up selling to a “friendly competitor” or a financial buyer in a “negotiated” transaction?  

When selling what is usually the MOST valuable asset of the owner’s net worth, their company, it is ESSENTIAL to create a COMPETITIVE tension to keep the buyer honest and validate to the seller that they have a fair deal.  Otherwise many of these owners just walk away because they do not understand the current market metrics and do not recognize a fair deal when it is presented to them.

Below is a synopsis of an actual transaction I was involved in where the owner had refused to retain our or any other investment banking firm to represent them in selling their very successful business. For reasons of confidentiality, certain facts and names have been changed.   


Bob and several siblings had taken over their father’s $10 million revenue family aggregate business twenty years earlier.  It was Bob’s vision to diversify out of the low margin, geographically restricted family business by establishing a new department to provide a more economical and dependable source of basic power tools and consumable items needed by residential and commercial contractors.   This quickly became the most profitable and fastest growing segment of the business.    

Bob was an excellent CEO who had assembled a solid management team with strong management and financial controls that allowed him to monitor daily how each of his 80+ locations were performing.  This along with a ten-year period of constant growth in revenue and earnings before interest, tax, depreciation and amortization (“EBITDA”) made this $220 million revenue company the largest privately owned value add distributor in their industry.

His siblings desired to sell some or all of their equity and Bob wanted to bring in an outside partner that shared his dream, provide liquidity for his siblings and allow him to remain as CEO and grow the company.  Bob desired to roll most of his sale proceeds into the new acquisition entity established on the same basis and terms as the new partner.  Bob had been pursued by several national and regional investment banking firms but he did not understand the value they added and what he perceived as excessive fees.  It was difficult for Bob to “trust” an intermediary that was not investing any of their money and were asking for fees that represented more money than he had taken out in salary for the past ten years.

Bob elected to manage this project internally with his existing outside legal and accounting advisers who did not specialize in mergers and acquisitions.  After signing a Letter of Intent (“LOI”) with a strategic buyer to sell for $100 million he quickly realized he was not going to be a partner but an employee and the company culture would change dramatically.  He walked away and several months later he was offered a term sheet from a private equity firm (“PEG”) for $115 million.  They needed his people and facilities and were eager to partner with him to acquire the largest competitor on the West Coast.  Bob’s goal was to grow the company to $500 million and then exit, allowing him a second bite of the apple.  Unfortunately, this well established PEG was not able to close on their latest fund and could not perform on their offer.  Thus, in the space of 6 months and many disruptions to his people and business operations, Bob had failed to find a buyer to partner with. 

After this very frustrating experience Bob contacted a partner of mine at the time agreeing to provide us a VERY limited opportunity to match or exceed the offer withdrawn by the PEG.  Bob’s conditions were: 1) he refused to retain our firm or pay our fee should we be successful, 2) we were given a 40 day exclusivity period to approach a limited number of potential buyers and obtain a LOI from a Buyer meeting his essential requirements and  3) the deal must close within 90 days of signing the LOI or he was free to walk without any financial penalty.  My first reaction to this risky and seemingly unreasonable request was to pass on the opportunity but after reflecting on the quality of Bob’s company, and the strong appetite of financial buyers hungry for quality opportunities like this, we accepted his terms.

The Transaction:

A one page “Teaser” was sent to ten financial buyers since a strategic buyer could not possibly meet the compressed time line to generate a LOI.  This was a perfect equity recapitalization opportunity for a PEG to acquire a strong platform to build upon and exit in five years.  The company profile was:

  • Strong CEO and management team
  • Excellent management/financial systems
  • Very little debt
  • Great growth story
  • Audited financials
  • Largest private company in their industry

Due to Bob’s two previous failed attempts, he had major deal fatigue but these experiences had crystallized his focus on what he needed to conclude a transaction (or so he thought).  He identified three essential requirements in the Teaser.  The buyer must meet or exceed the following three criteria:

  1. A Price of $115 million,
  2. The new Acquisition Entity (“NEWCO”) could NOT have more than 1:1 leverage post closing,
  3. BOB would remain CEO and continue to run the day-to-day operations with the understanding the goal was to grow the company and to exit in three to five years.  Bob also must be permitted to invest $30 million of his sales proceeds in NEWCO on the same basis and terms and conditions as the new partner.

In order to meet this very compressed timeline a single-bid, limited auction of ten PEG’s was conducted, six signed the Confidentiality Agreement and our Fee Agreement and FIVE submitted LOI’s within the 40 day exclusivity period.  This process resulted in TWO bidders presenting identical offers of $130 million.  A winner was selected based on cultural fit and key document terms of the buyer.  Diligence and document negotiations were completed within the 90 day requirement.


Six months earlier, Bob agreed to sell his company to a strategic buyer for $100 million in a negotiated transaction.  Had Bob taken the first offer he would never have received the offer for $130 million – a $30 million and 30% price difference!

Competition provides a seller with market validation and the peace-of-mind they have received a fair deal.  It also benefits the buyer since the seller managing the process internally is less likely to back out of the deal if he has third-party validation. This is NOT an option in NEGOTIATED transactions which usually always result in TWO things for the seller:

1.  A LOWER Price and

2.  LESS favorable Terms

Bob’s rules provided the foundation for the Maxi-AUCTION℠ process created by the M&A MARKETPLACE by CHC℠ to help level the playing field for the seller.
Upcoming TOPICS:
1.  When is the BEST time to SELL my Company?
2.  What is my Company worth?
3.  Is my Company READY to SELL? (ask for the Maxi-QUIZ for owners)
4.  Who is the BEST buyer for my Company?
5.  When do I tell my Employees, Vendors and Customers of my SALE plans?

Author: Huxley Nixon has been involved in M&A (mergers and acquisitions) for 35 years as a buyer, seller and intermediary.  He is founder of the M&A MARKETPLACE by CHC ( where the buyer pays all success fees and the process is only 120 days.  For owners of private companies considering a sale of part or all of their company – it provides a very quick, confidential and competitive alternative to current options less transparent and more disruptive for the owner.

DISCLAIMER:  Opinions and conclusions in this post are solely those of the author unless otherwise indicated.  This article is for general information purposes and is not intended to be and should not be taken as advice on any particular matter nor is it intended to be a solicitation regarding any securities transaction and or investment relationship.  For those desiring additional information please visit our website


One Response to “How Valuable Is A Competitive Process?”

  1. John Runningen July 18, 2011 at 3:10 PM #

    Getting a quick response from qualified buyers is no small task. Great service!

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