Does anyone have experience with competitive bids?

April 08, 2021

by a searcher from Tulane University - A. B. Freeman School of Business in Austin, TX, USA

My Partner and I have seen an increase in deals with expedited closing timelines. Has anyone else noticed this or purchased a business under these conditions?

As self-funded searches are we at a disadvantage in competitive processes?

What are some strategies to approach these type of deals?

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Reply by a searcher
in New York, NY, USA

Hi Maurio, I've been party to a number of competitive transactions both as a banker and as a principal. To answer your question directly, competitive transactions by definition put all buyers at a disadvantage. Buyers that are disproportionately impacted are typically first-time buyers without direct industry expertise or those in need of funding. You can generally circumnavigate that by building a strong relationship with the seller over time and earning his/her trust.

From what I understand, the SBA process can take a while, so I would think that would be a disadvantage, but interested to hear if others have mitigated that. FWIW, the competitive situation is almost always intended to increase certainty of close and purchase price. Good sell side bankers are adept at "walking" the bids up.

Every deal is different and intricate in its own way. A buyer with good deal instincts is generally able to build a strong relationship with the seller and banker, and determine how much influence the banker has on the seller's ultimate decision. They can sniff out where other parties are in the process and where they stand relative to others. They know when to push the gas pedal and when not to.

Baseline strategies to differentiate your bid are: (a) show you've done the initial work in coming up with your valuation and why this company is "the one", (b) have strong evidence supporting your valuation in the bid, (c) have a solid work plan and timeline for business and confirmatory diligence, (d) have evidence of funding.

Happy to chat more, if you'd like.

Reply by a searcher
in New York, NY, USA

I generally try to steer away from these competitive auctions. As a searcher, whether funded or self-funded, you’re probably not the highest bid. Your pitch to the seller is entirely different from PEs and family offices that are looking at the business as an investment (whereas you’re looking at it as a entrepreneur). In fact, I go out of my way to pitch to the sellers that I’m the opposite of a “financial buyer”. I want a seller that cares about those things and are not just looking for every last dollar (e.g. focus your message on maintaining legacy, you’re not just about dollars and cents, you’ll be taking care of their employees, staying independent, you’re an entrepreneur just like them, etc etc). If these messages don’t resonate with the seller, then I generally just go bark up a different tree. Too many high quality businesses out there (that aren’t well suited to a LMM PE buyer) for us searchers to have to chase broad auctions. Just my two cents.

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