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Discrete Divestitures, When to Stay Away from a Competitive Process.

As with Latin verbs, there are exceptions that strengthen every rule. So in what situations would a non-competitive process be more likely than a competitive process to result in a successful sale?

Two situations that initially come to mind are investor-driven. First, an investor may put such an attractive offer on the table that as the owner you may be tempted to forego other negotiations. Second, an investor may insist that there not be a competitive process, for whatever reason (e.g. they are not prepared to engage advisors and undertake the effort of Due Diligence unless they have exclusivity).

If either of these situations arise, you should ask yourself the following questions:

·         How sure are you that the offer you have received is truly exceptional (especially if you have not yet received competing offers or a valuation)?

·         What is the opportunity cost of your time? How much of a setback will it be if you spend several months negotiating with one party and yet the negotiations fall through for whatever reason?

·         What is the opportunity cost in terms of passing up other potential investors? Have other parties been identified? If so, have they intimated a valuation range? Will they still be around and interested in negotiating after several months have passed?

There are, as I see it, three other scenarios which might justify considering a non-competitive process:

The first is where maximization of transaction proceeds is not your objective and you have a particular loyalty to one investor, such as, for example, you want to reward your senior management for a long history of dedicated, loyal service, by selling to them via a Management Buy Out. Under this scenario though, (as with any scenario where you are providing exclusivity), it is important that you be clear with yourself in realizing that you are unlikely to maximize transaction revenues.

Second, you may be very concerned about sharing confidential information with a large number of investors.

Finally, you may have another shareholder with a right of first refusal. This can be problematic, particularly if the wording of the rights make it difficult to sell your interest to third parties, and you may have little choice but to at least attempt a negotiation with the party holding the rights of first refusal. In such cases, the holders of first rights of refusal usually believe that they hold the upper hand in the negotiation and it is a challenge in such situations to strengthen you own negotiating position.

Should you grant any party exclusivity, give careful consideration to the duration of the exclusivity. You may want to pin them down on a written valuation (e.g. in the form of a Term Sheet), and even stipulate that in the event that they attempt to reduce the valuation, the exclusivity may automatically expire.

Having forward situations where a non-competitive process might be appropriate, I would still advise business owners to try every means possible to sell your business via a competitive process, particularly if maximization of transaction revenues is among your objectives. If you do close a non-competitive sale process, how will you ever know that there was not another investor out there who would have been prepared to pay more or provide better terms?

It is best to view a non-competitive process as a fallback situation when a competitive process is not possible.



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