Why a Seller Might Select One Bid Over Another
Buyout professionals may wonder why a particular bid was selected while a seemingly more attractive bid was rejected.
The mistake many buyout professionals make is to submit bids that are too complicated. Sellers want simple, straightforward bids that they can understand and easily quantify and compare to other bids. Particularly in light of current economic conditions and the negative attention around complicated financial instruments, sellers focus on simplicity, clarity and certainty of closing. Sellers also want to work with individuals and organizations that have reputations for being honest business people.
In today’s markets, there are many possible structures that may be employed in connection with any potential sale. Just to name a few, there are stock sales, asset sales, part-stock sales, part-asset sales, sales based on contingent purchase price formulas, sales done for cash, sales done for equity or debt securities and any number of other possibilities. Buyout professionals often get wooed into using the newest, most elaborate structure. This temptation can often be a mistake. A seller, unless that seller is either a highly sophisticated individual or in the buyout business themselves, will often not understand the proposed transaction. If a seller needs to turn to its legal counsel or investment advisor to explain the structure of the transaction or quantify the purchase price, you have already put your bid at a disadvantage with respect to other bids that a seller finds understandable. As a buyout professional, you must remember that the person reviewing your bid is not a buyout professional and, even if they are working with a sophisticated banker or legal counsel, the business person or team in charge of making the decision wants to understand the structure of the bid and the amount and form of consideration to be received.
Stay within the bidding rules. The seller has set out the criteria it is looking for in connection with a bid, and the seller will be trying to match up the various bids to compare them in a short amount of time. If your bid is materially different as to form, it makes it harder to compare to other bids and may put you at a disadvantage. It also sends a message to the seller that you do not respect the process the seller has created and may either overtly or subliminally disadvantage your bid. It is alright to add additional items, but it is also important to provide the information as requested by the seller, in the form requested by the seller with not too much additional information.
Notwithstanding the advice in the preceding paragraphs, it always makes sense for a bid to include language that the parties can work to a different structure if the parties so choose. For example, as the diligence process continues, there very well may be tax structures (like a 338(h) election) that make sense. You should not foreclose the ability to restructure a transaction as you learn more about the asset being sold; however, the initial bid package should be as simple as possible with language that provides for the possibility to restructure the transaction should the parties mutually agree to such a restructuring.
Sellers want to know what they are getting, both in terms of amount of consideration and timing. If your bid package is confusing or overwhelming, you will have disadvantaged yourself against other bidders. Sellers are often trying to determine what the best proposed transaction is in a very short amount of time. As you are aware, often the decision on which bid to go with or who will make it to a second round of bidding is done within a 24 to 48 hour time period after bid submissions are due. Sellers want the process to move quickly. If sellers cannot understand your bid package because it is poorly drafted, is too complex or does not conform to the bidding procedures, they may simply disregard it and choose a more understandable bid.
Bidders should often include a one or two page summary of the transaction, in term sheet form. Using this approach, even if a full mark-up and explanatory letter is included in the bid package, allow sellers to quickly evaluate a bid. If your bid is easily understandable, it may give you an advantage over a bid that lacks clarity. It also overtly and subliminally sends a message to the seller that you are straightforward and will be easy to deal with.
Certainty of Closing
Perhaps the single largest worry sellers have, particularly in light of current market conditions, is that a proposed transaction will not close. Sellers, unlike buyout professionals, are not doing this type of deal in the ordinary course of their business. For a typical individual seller, the transaction you are bidding on may be the first and only time they are involved in this type of process. Sellers worry that they are going to incur large costs, both in terms of professional costs and time lost if the transaction fails to close.
All bidders should be cognizant of the fact that too much conditionality to closing is the death knell for a bid. Bids should contain tight but reasonable time frames for completion of the transaction.
Typically, one of the conditions is completion of diligence. To the extent possible, a bidder should indicate what information (or at very least what type of information) is needed to complete the diligence process and the time frame in which such diligence can be realistically completed (assuming it is received in a timely manner from seller). In addition, a bidder should lay out any required special approvals that are necessary (i.e. investment committee, equity holder approval and the like).
Additionally, the source of funds should be indentified. Sellers want to make sure a bidder has the funds to close. Financing outs are not going to work in today’s market and, in fact, given the current perception of lenders, even commitment letters are not as good as they use to be as far as giving a seller comfort that the purchase price will be available at closing. If at all possible, a bidder should provide seller comfort that there is no contingency to the purchase price payment.
Sellers want to know with whom they are dealing. They want to make sure that the individual or entity that is purchasing the asset they are selling will take appropriate care of it. In addition, when choosing which bid to accept, they want to be certain that the people or organization that is making the offer are going to follow through on the agreed upon terms and conditions.
It is okay to be a tough and strong advocate for your organization or entity. Sellers will not turn away because you have a reputation for being tough but fair. The reputational issue that can cause problems is if you are seen as someone who unilaterally changes the deal, does not live up to your promises, or vacillates and delays once a bid is accepted.
The key to a successful bid is to understand your audience and present your offer in a manner that is most appealing to that audience. Experience has shown that sellers want simplicity, clarity, and certainty. This is the key to being a successful bidder.
This article was written by James A. Grayer, partner, Kramer Levin Naftalis & Frankel LLP and originally appeared in Buyouts News.
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