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Chapter 1 of 3 · 11 min

Choosing the sale process

Broad auction, targeted auction, negotiated sale or dual-track: price against certainty, speed and secrecy.

By the end of this chapter you can
  • Describe the four main sale processes and what each trades away
  • Recommend a process from the buyer universe and what the seller cares about
  • Run the buyer funnel from first contact to final bidders
  • Work out how many parties to contact for the final round you want
1

The intuition

Selling a house, you could list it with every agent in town and hold open viewings: lots of buyers, the best chance of a bidding war, but it takes weeks and the whole street knows. You could quietly call the three neighbors who have always wanted it: faster and private, but less competition. Or you could accept the one buyer who knocked on your door with a good offer: quickest and most certain, with no competition at all.

Selling a company is the same choice, with more at stake. Every extra buyer adds price tension, and also time, cost and the risk that customers, staff or competitors find out.

The key idea

A sale process trades price against certainty, speed and confidentiality. The right process fits the number of credible buyers and what the seller values most.

2

Why it works

  • Broad auction. Contact a wide list of strategic and financial buyers. The most competition and the most defensible price, but the slowest, the most work and the hardest to keep quiet.
  • Targeted auction. Contact a short list of the most logical buyers. Most of the tension, faster and far more confidential; the risk is leaving out a surprise bidder.
  • Negotiated sale. Deal with one buyer. The fastest and most certain, but with no competition, so the seller needs a credible alternative to hold the price up.
  • Dual-track. Prepare an IPO alongside a sale and take whichever is worth more. The most options and the most cost.
  • The funnel. A process narrows at every stage: a teaser goes out, interested parties sign an NDA and receive the confidential information memorandum, some submit non-binding first-round bids, and the best few are invited into diligence and a binding final round.
A broad auction: 60 parties contacted, 60% sign the NDA, 40% of those bid, 25% of bidders advance
NDAs signed: 60 × 60%36
First-round bids: 36 × 40%14.4
Final-round bidders: 14.4 × 25%3.6
Overall conversion: 60% × 40% × 25%6%
Contacts needed for 3 final bidders: 3 ÷ 6%50
3

The formulas

NDAs signed = parties contacted × NDA rate

Who is interested enough to look.

First-round bids = NDAs × bid rate

Who puts a number on it.

Final-round bidders = first-round bids × advance rate

Who is invited to do full diligence and bid for real.

Contacts needed = final bidders wanted ÷ (NDA rate × bid rate × advance rate)

Work the funnel backwards.

4

Worked example

A broad auction. Multiply down the funnel, one stage at a time.

Drawing the numbers…
5

See it move

Same sale. Change how many parties are contacted and how many survive each stage.

Drawing the numbers…
Try this
  • Lower any one conversion rate. Every later stage of the funnel shrinks in proportion.
  • Contact more parties. Final bidders rise in proportion, and so, in real life, do the leaks and the management time, which no number here shows.
  • Ask for one more final bidder. The parties to contact rise by one ÷ the overall conversion rate.
  • Compare the two bars. On the same average rates the targeted list always yields fewer final bidders, which is why it only works when the names on it are the right ones.
6

Run it backwards

Same rates, reversed: the seller wants a set number of final bidders. How many parties should the bank contact?

Drawing the numbers…

Multiply the three stage rates to get the overall conversion: the share of contacts who end up in the final round. Divide the final bidders wanted by it.

If the answer is a long list, the seller is committing to a broad process, with the leak risk that comes with it. If it is short, a targeted process can work, provided the list is chosen well.

7

Traps

Recommending a broad auction by default.
Start from the buyer universe and the seller's priorities. A handful of obvious buyers, or a seller who values secrecy, points to a targeted process.
Treating the funnel averages as precise.
They size the outreach. A carefully chosen short list converts far better than a long tail of unlikely names.
Running a negotiated sale without an alternative.
With one buyer there is no tension. Keep a credible alternative, even just the threat of an auction, or the price drifts down.
Assuming more bidders is always better.
Past a point, extra names add leaks and distraction, and serious buyers may drop out if they think the process is a fishing trip.
Confusing first-round and final bids.
First-round bids are indicative and non-binding. Final bids come after diligence, are binding, and usually include a markup of the purchase agreement.
8

Say it in the interview

The interviewer asks

“Walk me through a sell-side M&A process.”

Say yours out loud first, then compare.
9

Check yourself

4 fresh questions, with new numbers. Answer each one correctly to finish the chapter. Get one wrong and you will see the full working, then you can try it again with new numbers.

Answers within 1% are marked right. Type the number; $, %, x and M are fine. First tries count toward Learned: the topic is Learned once every chapter is done and 75% of first tries were right.

0 of 4
Drawing your questions…
Remember
  • Broad auction: most price tension, slowest, least confidential.
  • Targeted auction: a short list, faster and quieter.
  • Negotiated sale: fastest and most certain, no competition.
  • Contacts needed = final bidders wanted ÷ overall conversion.