The choice of transaction process significantly influences the process and is a strategic decision. Recently, we set up a Miro board:
on which we tried to gather and evaluate the different alternatives. Feel free to check it out and comment. Today, we want to discuss it here:
Martin: We are often approached by entrepreneurs considering selling their company. A common trigger is being approached by a potential buyer, possibly familiar within the industry. The two companies might seem like an ideal match at first glance, and they want to negotiate exclusively with this buyer. How sensible is this?
Christoph: That often gives us goosebumps. Why? First, we’re, of course, glad to help an entrepreneur monetize their life’s work. And we fully understand that it feels better to speak with just one party, especially one that’s familiar and trusted. But there’s a host of problems and clear disadvantages that arise when conducting the transaction with only one interested party.
What are these, and do they truly outweigh the benefits of a broad approach?
Felix: First, we have the issue that process control is either not or only significantly less secure when dealing with just one party—not just slightly but massively. Why? Essentially, we are artificially reducing competition for a scarce economic good. This results in little to no opportunity to negotiate not only the price but also many other contract terms, including post-merger roles and developments.
Christoph: And not to forget, sometimes even more importantly, completely independently of terms, there’s no way to exert time pressure on the process. This often leads to unnecessary loops in the due diligence process, with the buyer’s internal resources and external parties not being pressed to complete the transaction. I’ve personally seen a promising transaction fall into an endless loop and ultimately get overthought to death. The deciding factor was the attempt to “prove the future.” This doesn’t happen when there is a competitive setup with decision points. If alternatives had been built up, this wouldn’t have been an issue.
What’s behind the desire to negotiate with just one company?
Felix: Often, it’s the fear of making the process public—whether to employees, business partners, or due to the uncertainties and resulting consequences. There’s also often the concern that it might spread in the neighborhood or even among friends. These fears are often unfounded and not always rational, but for that reason, they must be taken seriously.
Christoph: On the other hand, it’s often mistakenly believed that having only one negotiating partner means “less distraction” and “less work” compared to a structured process. Interestingly, we typically observe the opposite: when buyers know they’re alone, they tend to act more complexly—not out of malice; it just develops that way.
Under what circumstances is it possible to negotiate with only one interested party?
Felix: It can work if the relevant economic parameters are truly set from the start—essentially after the negotiation, if everything is clear about how things will look afterward. But ultimately, a very high risk remains. It’s not just about the valuation you can achieve for your company; it’s also about how secure the transaction is.
Christoph: Therefore, we recommend structuring the process as broadly as possible. Do you have a checklist of advantages?
Christoph:
- Better valuation, often unexpectedly good results from bidders who weren’t initially on the radar.
- Higher transaction security, meaning that the transaction is completed within a reasonable timeframe.
- Better opportunities to negotiate post-merger relevant points, such as the seller’s position in the sold company, location guarantees, naming, and other desired continuities.
As always, competition stimulates business.
What limits a broad, open process?
Felix: The ability to implement an open process is limited the more specific the search is or must be. A small, select number of buyers, or a very narrow market, are constraints that are simply market-specific. If there are only 4-5 “natural buyers,” then that’s just the way it is. In such cases, the order in which they are approached can be very relevant.
Summary
Martin: To summarize, the decision on how broadly to approach the market when selling a company has a significant impact on the outcome. Competition, in principle, stimulates business, providing not only better financial results but also identifying the best strategic fit. One should limit themselves only by the market, not by self-imposed restrictions. Engaging only one candidate, often requested by the buyer, is ideal for neither side—not even for the buyer.