In Today’s Market, Auctions are a Seller's Best Friend

If you are an active buyer (strategic or financial) looking for an attractive, well performing company in today’s marketplace, get ready for an extremely competitive process as Sellers are in complete control. Transactions are being valued and, ultimately, bid up to pre-recession multiples. 

Advantageous Sellers are partnering with Investment Banking Advisors (“IBs”) to facilitate identification, evaluation, selection and execution of the best strategic alternatives.  These IBs prepare and formulate value projections, identify counter parties, prepare marketing materials, and assist with the myriad of issues and decisions Sellers face.  In other words, Sellers are extremely prepared when they decide to go to market.

IBs develop a Target Buyer/Investor list, which encompasses: networks of professionals and clients, management’s knowledge of the Seller’s competitors, active acquirers interested in the Seller’s industry, proprietary database of likely financial acquirers, public and private databases, and industry trade journals and organizations. Once the marketing materials are finalized (ie teasers, Offering Memorandums, Management Presentations, etc.), the contact process begins. 

In a properly executed sale process, IBs will manage sensitive issues among various constituents, screen and prioritize the list of acquirers, and initiate contact with said acquirers on a confidential, no-name basis.  IBs will also distribute the marketing materials to qualified parties, and follow up and provide availability to address any issues not answered in the Offering Memorandum.  The goal is to create sufficient interest in the Selling Company, expecting to create a competitive auction.    

“An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder.”

The greater the number of interested parties in a competitive sale process, the higher the ultimate values realized.  Sellers and their IBs are well aware of their advantaged position are relying more than ever on auctions to market their assets, resulting in motivated financial and strategic buyers bidding up the transaction price.  We have seen these deals valued between 8x-10x EBITDA, or even higher in specific instances and industries.

Additionally, there are several other factors contributing to the high multiples and, therefore, the control enjoyed by sellers.   

1.   There are too many deals being marketed with “hair on them,” and too few good quality companies for sale.

2.   Equity sponsors have significant dry powder that needs to be deployed before their investors redeem.  When a strong transaction comes across their desk, many sponsors are determined to add it into their portfolio.  Price becomes a secondary factor in the pursuit.

3.   Financial institutions are being pressured to start lending again.  Thus, debt facilities for these quality deals are very competitively priced.

4.   Strategic buyers have managed their balance sheets effectively over the last several years and are flush with cash.  When an attractive, synergistic acquisition opportunity presents itself, they are willing to pay a premium.