Why it usually makes no sense to negotiate with just one interested buyer when selling a company.
Time and again, entrepreneurs contact us and tell us about an offer that a potential buyer has made them. Often an initial meeting has taken place and the first documents, e.g. annual financial statements and controlling reports, have been delivered to the buyer. Now the potential buyer is increasingly requesting very specific information and the seller of the company realizes that a relatively complex and time-consuming process, including negotiations, is beginning. He seeks professional specialist support from an M&A consultancy and in some cases also considers whether he is on the right track.
It doesn’t always have to be bad to negotiate with just one company buyer. But in most cases, we will try to take a step back with our client and inform them about the consequences of such a 1:1 M&A process. Our experience has shown that it is practically always better to talk to several potential buyers at the same time and that this has very concrete, value-enhancing advantages for the seller of the company.
Competition in company sales leads to a better company valuation
Everyone knows it and many have experienced it for themselves: If you are interested in something and the seller or agent lets it be known that there are other interested parties who are very interested in the same thing, the scope for negotiations is immediately restricted from the buyer’s point of view.
This mechanism also applies to the sale of a company. Multiple offers allow the seller to be more demanding, compare the offers and optimize their own position. In M&A practice, we repeatedly experience massive valuation differences that can amount to more than a factor of 2 between the lowest and highest offer. The following chart shows examples of such valuation differences based on real projects from the recent past. It includes the amount of the indicative offers received for so-called sell-side mandates (company sales).
Differences in company valuations from indicative offers
In addition to the company valuation, offers can also differ in many relevant aspects, e.g. with regard to the amount or structure of an earn-out, the amount of a purchase price retention (escrow), the expected length of time the seller will remain with the company or the structure of guarantees. If several offers are available, it is easier to optimize and negotiate the entire package.
Different buyers will also assess the specific characteristics of a company differently. For example, a strategic buyer can often value synergies more highly. Financial investors, on the other hand, have different experiences and networks that they can bring to the table or take into account in the valuation.
Competition increases the probability of successfully completing an M&A process
The sale of a company is a complex process. Due diligence must be prepared, the company to be sold must be presented attractively, a future-oriented business plan must be drawn up and much more. We estimate that the M&A process with a single potential buyer generates around 80% of the effort required for a structured M&A process with various potential buyers. It therefore makes sense to use the effort that is generated anyway to optimize your own position.
The problem is also that with only one buyer, the effort becomes a kind of lock-in for the seller of the company. At some point, the seller has already invested so much time and nerves in the process and simply wants to complete it. This puts you in a worse negotiating position with the potential buyer. In addition, the seller becomes dependent on the situation of one potential partner: If the latter’s business deteriorates and makes an acquisition difficult, a change in management or strategy is imminent – the probability of a successful deal is drastically reduced without the seller being the cause.
Take an active role and increase the number of your options
Don’t put the potential buyer in the comfortable position of thinking that the only alternative for you as the seller is “no deal” instead of “another deal”. This makes little sense. The sale of a company is a very special process in terms of content and emotion for every founder and shareholder. Why should you make yourself dependent on just one potential partner in this process?
So put yourself in the driver’s seat and reverse the roles together with an experienced M&A advisor. The seller should dictate the rhythm or choreography of the sales process and not react to the demands of just one seller.
In practice, a successful company will be able to generate a lot of interest in the M&A market. The second graphic uses a specific project example to show how we at Quantum Partners organize the process of researching and approaching potential buyers. Our maxim is to research the market of potential buyers very broadly and creatively and then to consolidate the results in a meaningful way. The company is only offered to potential buyers for whom there are plausible arguments for a possible takeover.
Examplary funnel from research to approach
Conclusion: The advantages of a 1:1 process lie only with the buyer
Overall, the advantages of a 1:1 process lie almost exclusively with the potential buyer of the company. For the seller, there are practically no advantages apart from a slight reduction in complexity, but many potential disadvantages.
Our recommendation is clear: if an interesting buyer comes forward and the sale of the company is actually worth considering, take your time to think about the best course of action.
If a sale seems interesting, take this as an opportunity to start a professional and structured process. Slow down the pace with the prospective buyer and justify this with the necessary preparation. The negotiation of a successful sale begins with the first contact. The more confident and informed a salesperson can appear, the better the outcome of a company sale will be.
About Quantum Partners
Quantum Partners is a corporate finance and M&A advisory firm for the Software & Business Services, Digital Media & Commerce, Industrial Technology and Cleantech & Sustainability sectors. From its office in Munich, Quantum Partners advises clients worldwide on the sale of companies, acquisitions and financing.
Call us for a confidential exchange of ideas. We would be happy to discuss our approach, our industry expertise and references for our work with you.
Dr. Andreas Brinkrolf
Managing Director
brinkrolf@quantum-partners.de
+49 89 414144 355
FAQ: Running a deal vs. running a process
Single deal or structured M&A process – which is usually more sensible?
In most cases, a structured M&A process involving several interested parties is more advantageous than negotiations with just one buyer: it creates competition, improves the negotiating position, and increases the chance of an optimized result in the sale of the company.
How does competition influence company valuation and deal terms?
Multiple offers can lead to significantly different results—in some cases with valuation differences of more than a factor of 2. In addition, offers often differ in terms of earn-out structures, escrow retainers, seller retention periods, and guarantees; competition makes it easier to optimize the overall package.
Does a structured process increase the likelihood of closing a deal—despite requiring more effort?
Yes. The organizational effort involved with just one buyer corresponds to around 80% of a complete process anyway. With only one buyer, the lock-in risk and dependence on external factors relating to this one interested party also increase, which can reduce the likelihood of a deal being concluded.
Are there situations in which one-on-one negotiations are nevertheless justifiable?
It is not wrong per se to talk exclusively to one buyer. However, in practice, the advantages of a structured M&A process with multiple bidders usually outweigh the disadvantages—especially when the focus is on maximizing value and achieving optimal conditions.
What should you do when you receive an attractive inbound offer?
Take an active role, slow down, prepare professionally, and start a structured process. The seller should set the pace (long list/approach, data room, schedule) instead of just responding to the requirements of a single buyer—this will increase the valuation, options, and likelihood of closing the deal.
