Buyers love to gain an advantage in a sale process. Over our 24+ year history, we have seen a multitude of buyer behaviors during sale processes. When it comes to initial bids, the buyer with the highest headline price is clearly hoping to win the solicitation process. However, the buyers with bids that are just below the highest might be the ones you want to give the most attention.
Aggressive buyers typically push top-of-the-market valuations when they determine their initial bids (a/k/a Indications of Interest). Aggressive buyers then look to lower their offers during due diligence, once they win the solicitation process and you (the seller) enter a letter of intent with them (an agreement granting them exclusivity). Thus, offers from aggressive buyers might look great initially, but they often age poorly.
At the opposite end of the spectrum, the second, third, or fourth highest initial bids might lead to a higher price and better terms in the end. Such terms, usually not addressed until the negotiation of a definitive purchase agreement, include working capital targets, indemnity escrows, the cost of RWI, and post-closing contingencies (as discussed in Deal Notes® 24, 53, 105, and 148). Furthermore, aggressive buyers often make offers without first having substantial institutional buy-in or sufficient financing in place. Conversely, the better buyers often have substantial institutional buy-in and financing in place before they submit an initial bid.
While the lower initial bids may look less enticing, they often turn out to be the better offers, with a higher price in the end, fewer surprises in due diligence, and easier negotiation of definitive documentation. Your M&A Banker can give you insights into the behavior of the buyers in your process and help you understand which buyers have displayed aggressive behavior in the past.
Have a great day,
Max McFarland
Associate
