Cash is often king when trying to sell a business. Yet that isn’t always the only consideration in determining to whom-or what-to sell.
For instance, when Steve Bowser, the president and third-generation owner of Dayton, Ohio’s Bowser-Morner Inc., started thinking about selling the company, what he ruled out was a sale to private equity. Instead, Bowser said he was working on selling the 104-year old company that his grandfather purchased in the 1920s to his lieutenants.
“Our objective has always been looking for long-term, consistent growth and a reasonable return,” he said.
While Bowser had decided not to hand over his third-generation business to another company or a financial sponsor, the practice of excluding one or the other type of buyer from an auction isn’t uncommon. Perhaps as many as one in five auctions occur where the seller has already decided that it will consider offers from strategic bidders, or from financial sponsors, but not both. Experts estimate that where a business is being exclusionary in its process, 10% of auctions are limited to strategic buyers while 20% are limited to private equity.
Some of that decision goes back to getting the best price for the business.
It’s a rule of thumb that a strategic will pay a higher premium than a financial sponsor-usually because the acquirer expects to realize cost savings from a combination. “There are definitely situations where a seller will insist on only strategics in a process because of the perception they can pay more due to synergies,” Susan Schnabel, co-managing partner at aPriori Capital Partners LP in Los Angeles, said in an interview.
“You’ll see that it’s actually very common,” David Hellier, partner at Bertram Capital in San Mateo, Calif., said in a recent telephone interview.
In fact, it’s common enough, Hellier added, that even financial sponsors looking to flip an asset that’s in their portfolio will decide to leave other private equity firms out of the bidding process. “We try to purpose-build our portfolio companies to be sold to strategics,” he said.
Trucking and logistics company ReTransportation Inc., a portfolio company of Tailwind Capital LLC, which acquired the business more than three years ago, decided to offer the company to strategic buyers and exclude financial buyers altogether.
“We decided to approach only a handful of strategics and stayed away from the private equity community,” Jeff Calhoun, a Tailwind managing director, said in an interview.
However, Curtis Tatham, co-head of financial sponsors group at the Chicago investment bank Lincoln International, said that, “in most situations, we’re going to go to both.” The bankers who advise business owners on an asset sale tend to have tremendous influence with the sellers, and will generally be the voice that determines whether an auction process will include both strategic and financial sponsors.
Financial sponsors, however, can be useful to situations where existing management remains committed to the business, but needs resources-either financial or operational-that a private equity firm can provide. “With several of our recent deals, the founder that owned the business saw significant opportunities in their business but didn’t have the resources to exploit them,” Hellier said. “Bertram offered a competitive price, but we also had the resources and cultural fit that they were looking for.”
PE firms can also be the more attractive option to business owners who don’t want to reveal trade secrets to a broad spectrum of strategic buyers. “There can be some real damage to the business” created by the due diligence process, Schnabel said. “When there are serious competitive or trade secret threats might you insist on financial sponsors-only in an auction.”
And there are those rare circumstances in which a large, perhaps even publicly traded company, is trying to carve a niche asset out of a larger business line. The company doesn’t want to send the market a signal that it’s been nursing a wounded business, or that it’s not up to the task of turning around the operation.
There is also another voice in the process-that of the banker advising the company, who, in the end, wants a deal done at the best possible price for the client and, not incidentally, for the fees his or her firm can earn.