Successful business owners know one tried-and-true method to grow and scale is through acquisition. In today’s competitive and complex marketplace, the competition is fierce for businesses with a proven track record and the potential for explosive growth. To maximize value, many sellers are turning to a competitive sale process. This article presents strategies to enhance the likelihood that your bid to acquire a business is successful.
In today’s M&A environment, buyers frequently face an extremely competitive sale process. Often, a seller will engage the services of an investment banker to market the business, prepare a data room, draft a confidential information memorandum, a memorandum of understanding (an MOU) and solicit initial indications of interests (IOIs) and letters of intent (LOIs). In many transactions, the investment bankers will also provide a process letter that sets forth conditions for a successful bid.
The obvious, and often most important, aspect of any bid is the overall purchase price a buyer is willing to pay for the target business. While it is seemingly obvious that the highest and best purchase price wins out (particularly in an “all cash” deal), sellers and their advisors often look at many other factors to select the potential buyers that they encourage to move on to the next phase of the process. In particular, sellers and their advisors analyze a potential buyer’s likely ability to close the proposed transaction.
For example, a buyer with a cash reserve to self-fund an acquisition likely has a significant strategic advantage over a potential buyer that, while still agreeing to pay all cash, requires a financing contingency to obtain a portion of the funds necessary to pay the purchase price. Further, in some instances, a target company might value an all-cash purchase price without a financing contingency more than a slightly higher purchase price with a financing contingency.
In terms of a bid process, a prudent investment banker and seller’s counsel will often provide a form purchase agreement for review and comment by a prospective buyer. It is often the buyer’s response to this request that can propel an offer to the winning bid. In some situations, the potential buyer will refrain from commenting on the form purchase agreement and simply indicate in its bid that its counsel will promptly mark-up the purchase agreement upon moving to the next phase of the process. On the opposite extreme, some potential buyers will engage counsel to prepare a full markup of the purchase agreement and state, in their bid materials, that the buyer is prepared to execute the purchase agreement as revised. Finally, there is a middle ground approach where some potential buyers will engage their counsel to prepare a comment memorandum. A comment memorandum highlights key revisions a potential buyer will make to the purchase agreement upon its selection as the “winning bidder.”
If the seller and the investment banker have taken the time and incurred expense to populate an electronic data room, the bid procedures will often ask the acquirer to indicate what additional due diligence is required as a condition to closing. While some potential bidders conduct limited legal and accounting due diligence during the bid phase, more buyers today are conducting more complete due diligence during the bid phase. Often, outside counsel will be engaged to quickly comb through the data room and draft a diligence memorandum for the potential buyer that outlines gaps in the diligence or key concerns that should be taken into account in making the bid. For example, if a data room is missing environmental due diligence, the bid may state that buyer reserves the right to conduct environmental due diligence. Further, if a data room discloses litigation, a potential buyer may indicate that such litigation is a retained liability or may require an escrow or a reduction in purchase price as security for or compensation related to the litigation risk. In our experience, those bidders who have completed or substantially completed their due diligence greatly increase their chances of being the successful bidder. Most sellers prefer a buyer that has completed its due diligence or identified the limited areas of confirmatory due diligence a buyer needs to complete before closing.
While there is an obvious cost to marking up a purchase agreement and completing due diligence in advance of a bid, our experience tells us these strategies increase the likelihood of success in a competitive sale process. Potential buyers must weigh the costs of preparing a successful bid with their overall acquisition goals and the strategic value of the target. As with any potential acquisition, seasoned transactional advisors can help guide potential acquirors through this complex and rewarding process.
