In light of the evolving M&A market, we are updating our report from nearly two years ago to reflect our current performance metrics and align our insights with the present M&A market environment. The current analysis not only reaffirms our previous recommendation against preemptive offers but also sheds light on the intensified challenges buyers face in today's economic climate. These challenges make it increasingly difficult for them to deliver on preemptive offers, underscoring our suggestion to completely avoid such offers.
Taming the Beast/Shifting Market Power to Your Advantage to Maximize Value
In past decades, business owners received a few inquiries per year and were faced with the question of how and when to sell when they were ready to retire, but today the question is much different. Due to technology and the proliferation of private equity, owners now are inundated so frequently (monthly or weekly) with inquiries and offers (from over 2,000 US financial buyers and over 4,000 US publicly traded strategic buyers) that the question is now whether they will eventually “settle” for an unsolicited offer or turn the tide to “tame the beast” and take control of the process to get justly rewarded for the decades of blood, sweat, and tears. Owners need to manage the process rather than let the process manage them. Unfortunately, we see weakness and “settling” as a growing trend as owners get fatigued (on top of pandemic related stress and exhaustion) and/or convinced that a quick, “secret” deal will bring the best results while saving on fees. Pursuing preemptive/one-off deals is only guaranteed to maximize seller remorse once the dust settles.
Pursuing Preemptive Offers - Risk of Getting “Fleeced” or Facing “Broken Deals”
Engaging in a preemptive offer presents a two-fold risk.
Sellers risk undervaluing their assets on the way in, with non-competitive letter of intent valuations.
On the way out, the vulnerability to an "11th hour price haircut" before closing can further depress the final selling price, emphasizing the need to avoid being "fleeced".
Sellers, eager to streamline the transaction, might unwittingly be leaving millions of dollars on the negotiating table.
Empirical research reveals preemptive offers tend to settle in at a mere 70% of the final price that competitive processes can yield, giving the buyer a 30% discount.
Serious Indications of Interest (typically 10 data points)
This initial markdown is further compounded, as subsequent negotiations post the Letter of Intent (LOI) can yield an additional 5-10%, primarily due to the lack of leverage (nearly all deals today involve a last minute “haircut” request.
Our observations reveal that when the exclusivity period begins upon the signing of the LOI with a preemptive buyer, it breeds a sense of complacency and lethargy in the buyer, effectively placing the seller in a precarious "zombie state". This phenomenon, as observed by Blaige, further leads to "broken deals". Private equity buyers now require a “Quality of Earnings” study and a “Customer Stability Survey” prior to closing – this is the “set up” for haircut.
Blaige case studies further demonstrate that preemptive offers often fall short by 40-60% compared to those obtained through competitive processes. As shown in the table below, we achieved a 49% average premium over preemptive offers in recent years. We obtained 60 offers, (an average of seven per deal), and only one of the preemptive parties prevailed in the Blaige process, but paid an 89% premium over their preemptive offer.
Our clients went through meticulous preparation of the sale process that led them towards accomplishing premium-value transactions. All were approached with preemptive offers and tempted to pursue independent sales. Their confidence in the Blaige Secret Sauce proved well-founded, yielding results that far surpassed expectations.
The Three Key Elements of the “Blaige Secret Sauce”:
Advantageously position the company to tell a compelling story.
Politely disregard preemptive offers.
Create a discrete, highly competitive bidding process.
While empirical research points to a 30% valuation discount associated with preemptive offers, when considering the broader picture, sellers embracing preemptive offers face an overall average loss ranging from 35% to 60%.
A highly orchestrated competitive process ensures not only that sellers receive the premium value for their assets but also empowers them to take control over partner selection, not vice versa. Opting for this approach enables sellers to navigate negotiations with strength and confidence, minimizing the risk of "broken deals" that may arise after the signing of the LOI.
Conclusion and Recommendation
The current analysis not only reaffirms our previous recommendation against preemptive offers but also sheds light on the intensified challenges buyers face in today's economic climate. These challenges make it increasingly difficult for them to deliver on preemptive offers, underscoring our suggestion to completely avoid such offers.
From our extensive experience, we can guarantee that pursuing preemptive offers almost always ends in seller remorse and sub-par value once the dust settles. Although each case is unique, we have observed a clear set of ingredients in high-premium valuation deals. We can do the same for you. Don’t get “fleeced”!
BLAIGE & COMPANY, with offices in Miami and Chicago, is an investment bank dedicated exclusively to the packaging, plastics, and chemicals industries. The Blaige team has decades of transaction experience, has completed over 200 transactions, and has visited and evaluated over 600 packaging, plastics, and chemicals operations all over the world. Blaige & Company’s proprietary research department, Blaige Industry Analytics (BIA), encompasses over 10,000 M&A transactions since 2000 on a worldwide basis.
The U.K.-based magazine Acquisition International named Tom 2015 Sector Focused CEO of the Year, and Blaige & Company - Sector Focused Investment Bank of the Year in 2013, 2015, 2017, 2021, 2022, and 2023.
Blaige is an in-house M&A advisor and active member of Flexible Packaging Association (FPA), Contract Packaging Association (CPA), Western Plastics Association (WPA), Association for Corporate Growth (ACG).
Thomas Blaige, CEO & Chairman
Mobile: (312) 806-4000
Office: (312) 337-5200