The Psychology Behind Selling A Business: A Case Study | M&A Masterclass

Five years ago in London, I woke up to this email. “Paul, bad news. Our highest bidder has simply reconfirmed its bid and set it to explode tomorrow. When can you talk?” Now, I was in the late stages of bidding on the sale of the business, and what was supposed to be a glorious final round of bidding turned into a massive disappointment. My highest bidder not only didn’t increase his purchase price, but now was attempting to use a shutdown move to wrest control of my process. I had a problem on my hands, and I needed to solve it quickly.

I’m Paul Giannamore. I’m an investment banker, and I negotiate for a living. Today we’re going to take the concepts that we discussed in part one of this series, and we’re going to apply them to a real-world live M&A transaction. How do we do pre-sale planning? How do we choose and set process? How do we use the concepts of leverage, information, and judgment to gain an advantage in a formal sell-side process? I’m going to focus on the psychology and the mechanics of an M&A transaction, beginning with my very first discussions with the client, all the way to how we solve the dilemma of my highest bidder trying to shut down my process.

Back in the fall of 2018, I had a meeting with the CEO of Nomor AB, a Nordic residential and commercial services business based in Stockholm. Nomor was owned by management and a Norwegian private equity firm. The board was in the process of determining whether now was the right time to sell. In recent years, they had been approached by a variety of strategic acquirers, as well as private equity firms interested in buying the firm. They brought us in for a few meetings, and we did what we typically do. We took a look at the business. I learned as much as I possibly could about the asset. I learned as much as I possibly could about the potential acquisition universe. We put together a valuation.

Typically, our valuations are ranged. We have range constructs: this business will sell from X to Y. Now, at the time, I thought that that business would likely sell for around 1.8 to 1.9 billion SEK, or 200 million USD. We had conversations with management. We had conversations with the board. And by early 2019, the board made the decision to go to formal process. Now, the board could have reached out to the buyers that approached them over the years and said, “Hey, make us an offer.” But being owned by a sophisticated private equity firm that’s in the business of buying and selling businesses, they know better. If you’re going to sell an asset, you run a formal process. If you’re going to buy an asset, you do everything in your power to avoid a formal process.

So when we sat down in pre-planning sessions in early 2019, one of the first things that I focused on is the asset itself. How unique is it? How differentiated is it? Is it one of 5,000 firms that are exactly the same, or is it a completely differentiated, unique asset? What sort of scarcity value does it have? When you have massive scale in a particular industry, where is it located geographically? What sort of resources and capabilities does the actual target, the asset itself, bring to larger acquirers or bring to private equity firms? Because at the end of the day, an acquisition is not just a financial transaction. Companies actually buy companies for unique resources and capabilities that could be leveraged in the future. So I really want to understand the asset.

I also really want to understand the buyer universe. So when I think about the Nomor process, we identified between six and ten potential strategic acquirers. Those were companies that are in a similar or the same line of business, typically publicly traded companies or large private equity platforms that could acquire a company like Nomor. And then we looked at potential private equity suitors. How many private equity firms have the capacity to buy a business the size of Nomor, in the geography that Nomor is in, doing the sorts of things that Nomor was doing? And we came up with between 50 and 60 total potential acquirers in our acquisition universe.

And the reason why I bring up the acquisition universe is, when we’re starting to think through what sort of process we’ll use, the asset itself, as well as the acquisition pool, is very important. And I’ll give you an example. Let’s assume for a second that Nomor had only one potential buyer in the world. Unfortunately, there are companies that literally have zero buyers or only one buyer. But if Nomor had only one buyer, it’s very unlikely that I would have run a formal auction on Nomor. It’s possible, but it’s unlikely, because when you’ve only got one buyer, it’s extremely risky to run an auction process. Because, number one, you might scare that buyer off if they don’t want to participate in an auction. And number two, one wrong move and you’ve got a busted auction. So when you’ve got one buyer, you might be better served by doing direct, across-the-table style negotiations.

But as you start to get two, three, five, six — six is a nice, juicy number — the more buyers you have in the mix, the more it allows you to move into auction-like sale processes. So when you’re selling your business, it’s very important that you think about it with the mindset of a hunter rather than a fisherman. A fisherman baits a hook, throws it in the water, and waits, right? That’s akin to a business broker putting a listing online and waiting for buyers to come. That’s not what you want to do. It works for some businesses, but if you’ve got a differentiated middle-market asset, it’s typically a very bad way to do it.

When I think about that sort of process, it’s almost like the distinction between, let’s say, Sotheby’s is going to auction off a Picasso, right? They could put 500 well-capitalized, extremely motivated art buyers in an auction room, or they can bring 500 people off the street and put them in an auction room. What do you think is going to perform better for the seller, right? Well-capitalized, sophisticated art buyers, rather than the 500 random people taken from midtown Manhattan. That’s the difference between fishing and hunting. As we build our acquisition universe, as we build our buyer pool, it’s very, very important to spend more time on that than I think a lot of us would like to.

I think for a lot of advisors out there, especially industry experts, you’ve forgotten more than your client knows. I know it’s really easy to gloss over conversations that they may have had with folks that approached them over the years. I also know that you’re going to hear some asinine, ridiculous shit. I once did a deal where it was a $100 million tech business, and my client said, “Hey, before we go out to market, I think we should add so-and-so to our distribution list, because I see him at the convenience store every morning.” Now, that wasn’t an ideal buyer to have in a pool for a $100 million business. So I understand sellers are not used to this, and they’re going to say some crazy stuff. But at the end of the day, go into it with a blank slate.

So when I think about Nomor, from the very beginning, I wanted to sit down with the client and understand every private equity firm that they’d ever talked to. I wanted to understand every strategic acquirer — and not just what happened, or not just who it was, but what was the conversation. And as we did that, we discovered that there was one acquirer that sat down with them for lunch or dinner and said, “No one can create more value than us. No one can pay more for this business than us. And we would like you to avoid a formal process and just come to us when you’re ready to sell. And we’re going to write a huge check. We’re going to do a preemptive offer. We’re going to make you happy.” So we discovered those things by asking questions.

It’s also important for sellers to sit back and think about what sort of firms can create value by buying your business. How can a large acquirer buy your business and leverage your technology? How can they get revenue enhancements based on some specific capabilities you have? How defensive might your acquisition be? If you’ve got two acquirers that can’t afford to lose your geography, you’re in a really good position. So it’s important for you, as sellers, to take control of your financial health in the same way it’s important for you, as an individual, to take care of your own personal health, right?

It’s like, if you were to get an unfortunate diagnosis and the doctor says, “Man, you’re out of luck. We’ve got to give you this chemo and do all sorts of stuff” — are you really just going to sit back and say, “Sure, Doc, I’ll do it. I’ll see you next time”? No. I think a lot of us are going to say, “Well, okay, what is my problem? Do I need a second opinion?” You’ll get online. You’ll read forums about individuals who’ve had this sort of disease and have gone through treatment. You’ll read medical journals. You’ll understand treatment protocols. You will be an active participant in your personal health. You should be an active participant in your financial health.

So, thinking through buyers: who’s approached you? Who haven’t you thought of? Put your thinking cap on. Think about this. And it’s okay to say crazy stuff. At the end of the day, it’s better that you come up with these ideas and talk to your advisor about it than not say anything. Because you can miss the one acquirer out there that can create a tremendous amount of value and really give you a blockbuster deal.

In the context of Nomor, we spent the time understanding the asset. We spent the time understanding the buyer. And we’re always thinking like hunters. So we want to make sure we understand what that buyer pool looks like. We’ve got it all laid out. Who are the key contacts? Who are the different individuals? What have these companies done historically from an M&A perspective? And then we’re going to think about, can we find out any sort of transaction statistics about deals they’ve done historically? We really do a lot of research upfront. And this is all part of putting together a formal M&A plan.

And I know the old adage that no plan survives contact with the enemy. That’s absolutely correct. I mean, in my 20-plus years of doing this, I don’t think I’ve ever had anything go to plan when I’m doing an M&A deal. But it’s the act of planning that allows the advisor to think three or four steps ahead. And when you get into the fog of war, all sorts of crazy shit goes on. It’s easy to act emotionally. But if you put together a plan, it has forced you to think about all the alternatives that could possibly happen when you get into the battles.

So again, as we walk through the pre-planning process, you are thinking about the end in mind, which is taking an asset that has no price on it. It’s going to be arrived at at the bargaining table. I don’t care what management thinks it’s worth. I don’t care what I think it’s worth. At the end of the day, the market’s going to set this price. There’s no objective price for a business. It is subjective. It depends on the narrative that I use, how I take that business through process, and how I use leverage to push up the price, get full price discovery, and, at the end of the day, end up in a position where we’ve gotten full price discovery and we can’t eke one more penny out of that transaction. That’s when I know my job is done, and it’s done well.

As we move forward with pre-planning, we’ve now understood the asset. We can begin to put together the CIM, or the confidential information memorandum, which is simply a sales tool. It is a deck that actually explains the operational and financial information on the company. Sometimes it’s 20 pages. Sometimes it’s 100 pages. It depends upon the size and complexity of the business, but it’s the primary selling tool for a formal sell-side process.

As we’re assembling the CIM and we’re putting together the buyer universe — and we’ll do all the research on the buyers — now we can start to think about choice of process. Before I get into choice of process, I’m going to take a step back to part one of our series here. I want to talk about some of the ingredients and the concepts in the formal sell-side process. At the end of the day, we’re trying to take a business that has no price. There’s no price tag on it. We’re trying to push pedal to the metal and eat every penny out of this, but we don’t know what the price is, and we don’t know where it’s going to end up. We’ve done some math. We’re going to assume right now that we’re operating in buoyant and dynamic markets, and it’s a great time to sell, but we really don’t know what that business is ultimately going to sell for until we get to that point.

As I said in our prior session, we can be aspirational. What I typically do is, we’ll come up with a valuation range, which I think is reasonable. I say, “Okay, it’s going to be from X to Y. If all things go well, if lightning strikes twice, we’ll get to Y.” Then I’m going to get north of that, and that’s going to be my target. I’m going to get ridiculous. I want to be like a kid. I want to ask for my cake and my candy. I don’t want to eat my broccoli. I want everything. This is what I’m going to shoot for as I start to put together my plan.

In the case of Nomor, we came up with approximately 2.1 billion SEK, which is a little bit north of 200 million USD. When I say SEK, I mean Swedish krona. This is a business based in Stockholm. We figured that the business was likely worth somewhere in the 1.8 to 2 billion SEK range, and I wanted to go north of that and make that our North Star. That’s our target. Okay, we’ve got a CIM put together, we’ve got an acquisition universe, we’ve got a target. Now what the heck are we going to do?

There’s a variety of different ways we can commence a process. As I’ve discussed before, we can do one-on-one direct negotiations, which certainly did not make sense, because the only time you would ever want to do one-on-one direct negotiations is when there’s only one likely buyer for a business. Now, for the majority of you out there, if you’ve got a differentiated business that’s kicking off cash flow, and you’ve got resources and capabilities — you’ve got a business that you could sell — you might find three potential buyers for it, five potential buyers, ten; the list goes on. The more buyers you have, the more you want your process to be auction-like.

And when I talk about auctions, as we’re thinking about the choice of process for Nomor — a standard auction, which is kind of a derivative of the open-outcry auction, which is what we typically refer to as an English auction, right? Any ascending-price auction is an English auction. And, you know, Sotheby’s sells a Picasso, they’re using an open-outcry English auction. They’re starting at roughly 50% of where they think the price will ultimately end. They’re starting with big bid increments. So, a $100,000 painting — we’re going to start at $50K, we’ll use $10,000 increments and decrease them as we go up, and we’ll hope to breach $100,000. That’s a very plain-vanilla English auction.

Now, we’re probably not going to sell a business using the format of an open-outcry market. Now, it does happen. It happens typically in what would be called a 363 bankruptcy sale. That’s where we would typically see open outcry. So we’re going to use a sealed-bid auction mechanism, meaning it’s private. No one buyer knows any of the other participants. With an open-outcry auction, you’ve got 500 people in the room. You look around, you know who else is bidding. In a sealed-bid auction, no buyer knows who the other buyers are.

Now, they can assume, right — I mean, they’re sophisticated. If you’re buying a certain specific, let’s say, a chip manufacturer, right, a microchip manufacturer, the chip manufacturers are going to know who the other manufacturers are and who’s likely to participate. But at the end of the day, it’s confidential and it’s private. Furthermore, this is not something you’re announcing, right? I mean, you take your business out to market, you use a sealed-bid auction, it is very quiet. You’re not putting stuff on the internet. You are inviting a small group of participants to come in and participate in your sealed-bid auction.

So as we start to get a little bit more granular, as I was thinking through the Nomor process, I looked and I said to myself, “Well, we’ve got roughly 40 or 50 private equity firms. We’ve got roughly 10 strategic acquirers.” The majority of the firms that we were dealing with had had experience in auctions before, right? Because sometimes acquirers just don’t know how to participate in an auction. They don’t abide by auction rules. They really struggle with the concept of an auction. These buyers are inexperienced, and they just — “Hey, tell me a purchase price and I’ll tell you if I can pay it or not.” But those aren’t necessarily the folks that we want to deal with. In this particular case, these buyers were sophisticated strategic and private equity acquirers that were used to participating in auctions. So we thought to ourselves, let’s start with more of an informal auction, and we’ll become more formal over time.

And so, what do I mean by that? My job here, right out of the gate, is to look at my buyer universe and begin to mold perceptions. And I have to be very careful with this, because sometimes when investment bankers go out and deal with buyers, they’ll throw out big numbers, huge guidance. And so I don’t want to scare anyone, but I need to figure out how to very smoothly and gently bring competition. Because, again, a formal process includes both auction-like mechanisms — where buyers are bidding, right, they’re competing amongst themselves for the right to buy the business — and across-the-table negotiations, where I’m negotiating directly, individually, with each party.

In the case of Nomor, we had 50 buyers. Now, I could have gone out sequentially and dealt with each buyer one-on-one. I could ask for an offer, they make an offer, I do a counteroffer, concession, counteroffer, concession, back and forth. Typically, that would be extremely costly, time-consuming, and likely not yield the results I want, right? Because there’s no competition, and they’re really pushing things up. And furthermore, I don’t have offers to compare. I want to be able to look at everything simultaneously, and I want to do this in parallel. So I’m going to begin to use some auction-like mechanisms.

The first thing that I want to do is, I want to dig deep. I want to get as much information as I can on all the different acquirers. I want to understand their motivations, the capacity they have to pay. I want to understand who the different individuals are there at the organization. Because, remember — people think that organizations, so entities versus entities, are doing deals. It’s not necessarily the case. So, organizations are doing transactions, businesses are doing transactions, but it’s the people at those organizations. For the selling entity, it’s the sellers, the ownership. And for the buyers, it’s the corporate development team, it’s the senior executives there. Those are the individuals actually doing the deal. So I want to understand as much as I can about those folks.

So I ferret out as much information as I possibly can on the sell side to understand how my client’s business might create value for each individual buyer. It’s a lot of work, but it’s worth it. After that, I say to myself, “Well, how do I introduce competition?” And typically, I tend to take the approach of casting a relatively wide net on the front end. And instead of using formal bids, I like to use indicative bids. And you’ll see this — it’s prolific throughout investment banking. Great investment bankers are going to ask for indicative offers, or indications of interest, at the front end of the process. And the purpose of that is, we want to introduce as many buyers as we can to the front end of the funnel.

And we want them to put an offer on the business in round one. It’s simply something that says, “I will pay X for the business. Here’s what I’ll do with it. Here’s how I’ll finance it. Here’s what I’ll do with management. And here are the regulatory constraints I might have.” And we want buyers to provide a bid, all on the same day, doing the smallest amount of work as possible. Because if we want a more formal bid, like a full-on LOI, it’s going to require buyers to do more. And a lot of buyers will just fall out of the process, because they don’t want to spend time, money, and effort attempting to bid on something that they don’t know much about. And they don’t want to incur the cost of figuring it out if they don’t think that they’re going to likely prevail in the process. So you want to make it very easy.

And as far as process rules at the very beginning, that’s the extent of the process rules. We’re the sell side. We’re setting the process. Here are the rules: “Two weeks from now, provide us an indicative bid.” We’ve cast a wide net. We’ve got a wide funnel. “Come on in. We’re all in.” So, in this process, what we hope to do is, we hope to get 10, 15, 20 maybe indications of interest. And it’ll allow us to kind of understand where the market is at, in general terms, with regard to valuations.

Now, in the case of Nomor, I was hoping to get 2.1 billion SEK or more. But when our indications of interest came in, they tended to cluster around 1.3 to 1.4 billion SEK. So, substantially lower than where I wanted to end up. And quite frankly, that’s okay. And, you know, it’s frustrating, I think, for clients. I deal with this on a day-to-day basis. When those initial offers come in, sellers get pissed. “This is offensive. I can’t believe it’s so low.” But at the end of the day, IOIs and front-end offers tend to be low, because buyers don’t know a whole heck of a lot about the business yet. Quite frankly, they’re testing the water. I mean, why are they going to go all in on a first bid, unless, of course, they want to preempt the process?

So, in the case of Nomor, we did have a buyer that said, “I want to preempt the process. I want to shut down the process before other buyers have the opportunity to spend a lot of time, money, and effort learning about the business, only to increase their bid.” So one of the acquirers stepped up and said, “Here is our preemptive bid. No one can pay more than us: 1.7 billion SEK.” The client immediately responded, “This is ridiculous for a preemptive offer. If you want to shut down process, I expect to see something north of 2 billion SEK, not 1.7 billion.” So, at the front end of this process, right after the IOIs, I had a conversation with that particular buyer and said, “You didn’t win. Clearly, this is a low bid for a preemptive bid, and we intend to do substantially better throughout this process.”

Now, after indications of interest, your goal as an advisor is to try to whittle down the playing field as much as you can. There’s going to be a lot of garbage in there — companies that you really feel like had an analyst at two o’clock in the morning write up an IOI and just tendered it, just to see what was going to happen. You try to whittle those down, because as you move through the process, you want to boot potential participants from your process. So, once you get along this way, the price should be going up, and the buyer field, or the pool of participants, should be getting narrower and narrower.

It is very, very difficult to simultaneously negotiate with more than seven or eight buyers at any given time. So, again, start wide, get as many indications of interest as we possibly can. And then, after the indications of interest come in, now we go back to each buyer and we ask them if they’re really serious. We say, “Hey, we are now going to have management meetings. So you’re going to have the ability to sit down with management. You’ll be able to spend a half day with them. You’re going to be able to learn more about the business. It’s going to cost you money. You’re going to have to get on the plane, fly halfway across the world. You’re going to have to hire outside advisors yourself to really invest in this process. But in order to do that, you need to increase your bid. Your bid’s not sufficient. You didn’t win a management meeting.”

And so, typically, before management meetings, we might have two or three rounds of bidding, even before we get to a management meeting. And it’s important for buyers to actually be able to purchase their seat, so to speak, or purchase the opportunity to sit down with management. So, typically, what would happen is, after the indicative round, we would go to the next round. And the next round would be, like, “We are holding management meetings three weeks from now in Stockholm. If you’re interested in participating, please revise your bid.” And we would give very similar bid instructions as we did in the indicative round, and they’d be required to tender a revised bid.

And what we hope to do here is a couple of different things. I like to think about the investment principle. I guess I can talk about the investment principle in a variety of different ways. One way that I think is pretty useful, and that I think is pretty easy for everyone to grasp, is: we, as humans, don’t value something that we don’t expend effort to get. We don’t value advice we don’t pay for. People don’t value concessions that come quickly. And so, in the context of an M&A deal, I always get pissed when inexperienced buyers roll over too quickly. Because I know from experience that, hey, this guy didn’t decrease his concession sizes. He kind of went all in at once and conceded on everything.

But the seller, who doesn’t do this every day, says, “Well, wait a second. They just gave us an extra $5 million. There’s probably another $5 or $10 more.” When I’m thinking to myself, there’s probably not. So, when you don’t make the other side work for something, they’re not going to value it. So you’ve got to really battle it out.

The corollary to that, though, when I think about the investment principle, is very similar when you’re investing in an M&A relationship. If, early in the process, each individual buyer hadn’t invested time, money, and effort into the relationship, and then you want to see big numbers up front, it’s very easy for them to walk away. I mean, there’s almost no cost. It’s like, “Hey, I spent a few hours. I read some materials. I put in a bid. Now you’re giving me a big counteroffer. I don’t give two shits. I’m out of here,” right? But the more effort they expend, the more they get to know the management team, the more they’re talking about it with their board, the more they put their individual name on this, the more they want it, and the more difficult it is for them to walk away.

So, we always have to think about a formal process in the context of investment. You want the buyers investing time, money, and effort each step of the way. The other thing you want to think about is incrementalism, right? Somebody comes in and says, “I’m going to give you $1.3 billion.” I could turn around and say, “Hey, I want $2.5 for it.” And then I find myself in a bargaining — basically positional bargaining: $1.3, $2.5, $1.5, $2.1. And we go back and forth, and typically we’ll end up somewhere kind of around the middle. Nine times out of ten, folks, when they do that, end up at the midpoint. I think it’s generally a losing proposition, in a lot of ways, for sellers, when they have the ability to run a formal process, to get engaged in that sort of stuff.

And, as I always say, as a process setter, you want to lean into process as much as you can. On the sell side, you are a process setter. You control the process. You attempt to make sure the other side doesn’t wrest control of your process. And wherever you can use process and process rules to extract resources out of the other side, you do that, instead of having that sort of direct negotiation. So, again, we’ve got this process. We start with indicative bids. What we’re trying to do is, we’re trying to get investment by the other side, all the other buyers. We want them walking through the process, spending more time, money, and effort. And we want them to focus on slowly and incrementally increasing their bid.

Because, now, listen — there’s a huge gap between 1.3 billion SEK and 1.9 billion. There’s not that big of a gap between 1.8 and 1.9. And so, from a psychological perspective, it’s way easier. Yeah, what’s another 5 million SEK, right, versus what’s another 500 million? So, incrementalism and investment.

As we went through the bidding rounds for Nomor, we decided to bifurcate things. We started first with the strategics. And we kind of did it during Scandinavian summer break. So we started this process in July. And we focused first on the strategics. And the reason why we focused on the strategics is, for this particular asset, we thought that the strategics were likely to be able to pay more than private equity. And we also knew that we could bring in private equity later in the process. So what we did is, we started very informally. We set up an indication-of-interest deadline. And while we were dealing with the strategics, we had fireside chats with the private equity firms to allow them to meet management, allow them to invest in the process, allow them to not be excluded. In the event we wanted to go to a broad process with both private equity and strategics, we could easily pivot and do that. But we wanted to really see where we could get with the strategics.

Now, we had gone through three rounds of bidding prior to management meetings. And that’s not typical, per se, but in this particular process, that’s just the way that it worked out. And so we began with 10 strategic acquirers. And by the time we were beginning to make the decision on management meetings, we were down to four. In fact, one of the four, ServiceMaster, was the lowest bid. And we had a lot of discussions internally as to whether or not ServiceMaster should be invited to the meeting or not. ServiceMaster went from second bid to third bid, and instead of increasing the bid increment, they stood pat. They said, “We’re just going to reconfirm our bid. And we don’t want to bid anymore until we’re able to sit down with management and really think through the investment thesis.”

You’re oftentimes faced with that sort of decision when you’re running a process. It’s important to really exercise some judgment here. And the dilemma that I was faced with: on the one hand, if I got rid of ServiceMaster, I would lose a bidder, which is effectively 25% of my bidding pool at this point in time — gone. Just by saying, “Hey, your bid didn’t make it. You’re not coming to management meetings.” But then I had to really think hard about rewarding bad behavior, right? So, they just reconfirmed their bid, and I’m going to let them slide in?

As I told you in session one, information’s important. It’s not just what you say or what they say. It is your actions. Every action you take in an auction process, or in a negotiation, reveals information. So, on the one hand, if I kicked them out, they would be like, “Shit, those guys are serious.” But then none of the other buyers would know about it, because it’s a sealed-bid auction. They don’t even know the existence of ServiceMaster. If I do let them in, then I have just signaled to them that, hey, they just reconfirmed their bid, and it’s sufficient to get in. And maybe there’s not as much competition as we think.

And so, as we talked about it, we ultimately decided to let them come to the meeting. And the reason why we decided that is, I didn’t want to lose a bidder. I relied on judgment, saying that, even though I’m giving a potential signal to them that competition is an issue, that the bidding is fierce, and that I am not going to adhere to my own process rules — we were still running a really loose process at this point in time. And I thought I had more to lose by booting them out than keeping them in. And that’s not always a decision I’ll make. But for a fact-specific situation, it made sense to me. And it made sense to me because ServiceMaster was the one, from the get-go, telling management, “No one can pay more. No one can pay more than us. No one creates more value.” They were the ones that attempted to preempt the deal — but with a low-ball offer, what we viewed as a low-ball offer. So I thought to myself, “Well, I don’t see a whole lot of downside in keeping them in the process, allowing them to have the management meeting. And if this kind of activity continues, we’ll just kick them in the teeth.”

So we had the meeting. Immediately after a management meeting — and pretty much any sort of process you’re running — that’s when you would ask acquirers to once again revise their bid forward. So they meet with management. We answer some questions. There might be some follow-up. It could be a few days later, a week later, two weeks later. But at some point shortly thereafter, after the management meeting, in order to stay in the race, they have to revise their bids. That’s what we did. And so, thankfully, management was stellar. It was really a phenomenal performance by management. They did everything right — everything that I talked about in the first session of this series. And so we saw a huge jump in bids. The bids began to cluster at 1.75 to 1.8 billion SEK after the management meeting.

So now we are getting into round five. We, again, provided more information. The acquirers are not only negotiating the offers, but they’re also negotiating the purchase agreement at this point in time. So we provided a draft of a purchase agreement. It’s important to do that because, in a very competitive process, once you go into exclusivity with a single buyer, you lose a lot of leverage. And so, in certain circumstances, we’re going to be negotiating not only the broad terms, like price and structure, but we’re also going to be negotiating ancillary terms in the purchase agreement simultaneously. So we provided a draft of a purchase agreement and asked each buyer to have their attorney mark up that purchase agreement and then tender it to us along with their bid. And so we went to another round.

And here’s where we started to see a few cracks in the surface. By this round, we begin to see bid increments decrease. And this is one of the things that I think advisors should pay close attention to as you’re running through a process. So, let’s say we start with Nomor. We might start at 1.3, and then it goes to 1.5, and then it goes to 1.7. We see 200 million SEK increments. But by the time purchase price starts to get a little bit uncomfortable for buyers, we start to see buyers reconfirm bids — so, not move up in price. We see acquirers making 100 million or 50 million increments. So, by the time we get to the fifth round, we had these things clustered in the high 1.7s, low 1.8s.

And we started to think that now would be the right time to get the private equity firms spun up for a broad process. Because, again, my target was 2.1. And already, this thing was trailing off here. I was starting to get compressed bid increments. So we thought, let’s add some additional competition into the mix. Now, whenever you think about a modified auction like this, I think it really takes a lot of judgment and balance.

When you’re in a bidding round, you’re not going all in on price, because you’re going to think, “Well, I put my highest reserve price there. They’re just going to shop that deal, and somebody’s going to come in right over the top.” So you’re always holding something back. It’s akin to a marathon, right? It’s like, you see guys running for an hour and they’re pacing themselves. But then, once that finish line is in sight, man, these guys take off — they sprint to the end. So at some point, you need to show buyers the finish line. And sometimes you do that at the very beginning of the process. You say, “We’re going to do two bid rounds, or one bid round, or five bid rounds — that’s what we’re going to do.” But sometimes you remain a little bit more ambiguous, and you use your judgment to determine whether or not you’re going to show the buyer the finish line.

And so, we finally got into about the fifth or sixth round, and we had one offer at 1.7, we had two at 1.8 billion SEK, and we had our highest bidder at 1.85 billion SEK. And at that point in time, that bidder was the favorite. That bidder was always the highest bidder. They communicated very well, the management teams liked each other, and I started to think to myself, “This is probably the most likely buyer.” But then I stopped myself, and here’s why.

Whenever you start a process, as an investment banker, as an advisor, I think it’s very, very important that you don’t go into it with any preconceived notions. And you, the seller, should do the same thing, right? Don’t go into a process favoring any buyer. Let the market and the facts speak, right? I used to, you know, joke around the office — it’s exciting to say, like, “Oh, Company XYZ is likely to prevail. They’re going to create the most value.” But I find that that tends to sometimes distort behavior. So I think it’s better — and I have to, even as an advisor who does this every day, I had to stop myself and say, “You know what? I’m going to lean into process. I’m going to run this right, and I don’t care who’s going to prevail. At the end of the day, whoever prevails is going to put their best offer on the table.”

We set a bid date for Wednesday morning, and I was in London at the time. And I remember waking up and getting an email that says, “Paul, bad news. Our highest bidder reconfirmed their offer and set it to expire tomorrow. When can you talk?” And, man, I was expecting to try to get to 1.9 billion SEK on this thing. I thought — we told the acquirers this is going to be the final round, like, “Come all in” — and our best buyer just reconfirmed their bid. Like, why wouldn’t you just go up and try to snatch this?

Well, I had some conversations with some acquirers, and here’s what was going on. A lot of them had gas in the tank, but they didn’t really believe — they believed, at this point in time, every one of them thought they were overpaying for this asset. Which, quite frankly, they were right. It was an extremely healthy price. It was 20 times. It was the highest in the industry at the time. It was an extremely high price. So they thought they were overpaying already. They were not 100% sure that anything they would put on paper wouldn’t be shopped by us. We attempted to build the credibility that we wouldn’t do that. I think we were very fair, and we gave the same instructions to all of them.

Of course, this was the company that had told us at every single meeting that no one could pay more than them. I started to think to myself, “Well, are they credible or not?” So I got up that morning, and I was pissed. Because not only did we not hit the 1.9 billion SEK that we expected, now I have my best buyer come in and say, “I’m going to use a shutdown move. I’m going to wrest control of your process.” And here’s what I mean by that. Their offer said $1.85 billion, not a penny more, “and you’ve got 24 hours to accept or reject this.” So they now are attempting to change the rules of my, “Hey, this is the final bid round, buyers.” And now the buyer’s going to step in and say, “Hey, take this or leave this.” That’s not the way it works.

And so I’m extremely irritated, but I did exactly what I advise everyone on my team to do, which is do absolutely nothing. I showered. I got dressed, got a cup of coffee, and I went out and walked the streets of London. And I really wanted to think through the process. What sort of options did I actually have at this point in time? So, as I walked that morning, I thought to myself, “I’ve got four bidders who are essentially neck and neck. They’ve all proven that they really want this transaction. Every one of them is trying to take the discussions offline and engage in one-on-one direct negotiations.” And then it hit me. I needed to introduce rules. I needed to introduce risk into this situation. I needed to put these buyers in a position to lose.

Now, again, they invested a ton of time. This had been a multi-month process. I talked about the investment principle. These guys got on the plane. They flew to Stockholm. They spent a lot of time meeting with management, dining with management. They’ve done a tremendous amount of diligence. Every one of these acquirers had spent hundreds of thousands of dollars in legal fees and due diligence. And I needed to pick a horse.

How does the U.S. Treasury auction off Treasury securities? They don’t use an ascending-price English auction. They use a descending-price Dutch auction. I’d never done it before, but I thought to myself, “Why not?” Because every chance I get, I try to lean into process as opposed to directly negotiate. So that’s exactly what we did.

So, what is a Dutch auction? A Dutch auction, for example, in the Netherlands — two million flowers are sold every morning in the Netherlands, and the process is a Dutch auction. The price starts high and it descends. As the price goes down, when somebody wants to buy flowers at a certain price, they hit the button. They buy the quantity of flowers that they want at that price. And when they’re done, it keeps moving down until all the flowers are gone. Dutch auctions are great for speed. They move very quickly. But more importantly, they’re great for risk. Because if you’re willing to pay $2 for something, and you think you can get it for $1.75, do you really want to take the risk that somebody’s going to come in and buy it for $1.98, for example? So that introduces risk into the equation.

So, as I walked that day, I set up the call. Remember, we did it at one o’clock in the afternoon, Central European Time. And I said, “Why don’t we begin at 2.1 billion SEK and run a Dutch auction?” Which means we go out to each individual acquirer and say, “Acquirer A, the price on the tape is 2.1 billion SEK. You don’t have 48 hours. You don’t have a week. You have eight hours. At the end of eight hours, you’ve either rejected this or it expires, and we go to the next bidder. And once we go to the next bidder, we’re going to give them eight hours, and the price is going to go down. If they reject it or it expires, then we’re going to go to the next bidder, and the price will continue to fall. It may come back to you, or it may not come back to you. But this is where we are right now. Acquirer A, here you go: 2.1 billion SEK. You’ve got eight hours.”

The bidders don’t know how many bidders there are. They don’t know if there’s two. They don’t know if there’s one. They don’t know if there’s ten. But at the end of the day, it introduces substantial risk. Because if somebody’s got a bid of 1.85 billion SEK now, and they’re willing to pay 1.9 for it, do they really want to risk somebody else swiping it off the table for a price that they would have paid? And so we went through all the acquirers once. And by the time we got back to Acquirer A, they hit the bid at 1.93 billion SEK. The deal closed with ServiceMaster two or three weeks later.

Why I wanted to give this Nomor example today is because it provides a lot of insight into process setting and process rules. For example, Acquirer B — the one that was at 1.85 billion SEK and used the shutdown move — they attempted to change the process rules, right? “Accept our bid today, or otherwise we’re out the door.” That wasn’t their role; I was the process setter. I certainly didn’t want them to have the opportunity to do that. And, unfortunately for them, I think in many circumstances — had they done a shutdown move earlier in the process; maybe not in the Nomor process, because I don’t think we would have accepted the 1.85 billion — but an appropriate time to use a shutdown move is way earlier in the process.

If you wait until the very end — if, in fact, we didn’t have any other buyers, that was Acquirer B saying, “I don’t think there are any buyers at this level. I think we’re the only one here. So quit messing around, take our number, we’re out the door.” Unfortunately for them, it backfired. The use of the Dutch auction is leaning into process.

So, again, you have decisions to make on all this. You know, whenever you start a formal sell-side process, on the sell side, you’re the process setter, but you’re always negotiating process and substance, right? You’re negotiating the process rules, but you’re also negotiating the substance — so, the terms and price of the transaction. And to whatever extent you can lean into process and allow that to do the negotiating for you, you should do it.

As I think back to that transaction, I was at the point where we instituted the Dutch auction where I was almost prepared to negotiate one-on-one, because we felt like there was a little bit more gas in the tank. And we didn’t think a traditional ascending-price English auction would get it done. We didn’t think that buyers would really revise their bids forward, based not only on the activity that we saw — like the decreasing bid increments — but the moaning we heard from buyers directly, as well as them desiring to have it come to an end, to have one-on-one negotiations with us. So I didn’t feel like another round, or a survival round, was going to be the way to go. And that’s why we went the Dutch auction route.

And so I think, for our purposes, you should always attempt to control the process the best that you can. You need to fight the shutdown moves from the other side, which will inevitably happen. But just remember, you want to stay in control of this process. However, the longer you do this and the more experience you have, the more judgment you’ll have. And you have to always keep in mind that these aren’t hard-and-fast rules. Some of these rules are meant to be broken. And I always tell folks, lean into process as much as you can, but don’t throw the baby out with the bathwater. You’ve got to have balance.

You’ve got to actually pay attention to what the bidders are actually doing. Pay attention to the flow. Pay attention to the bid increments. And use your best judgment as to whether you need to lean more into process, or whether you actually need to go on to, for example, one-on-one direct negotiations, or entirely change the process completely — change from an English auction to a Dutch auction. Do it one morning, overnight, over coffee. Wake up, change the process. You have the ability to do that, but it’s something that you learn over time, with judgment.

You know, you as a seller need to be an active participant in your own process and work directly with your advisor. You know, as I mentioned, prior to management meetings, one buyer stood pat. And we had a disagreement. The client actually said they should be booted from the process. Now, they’re ultimately the acquirer that won the deal in the end, at $1.93 billion. But there was a disagreement. They said they should not be rewarded for standing pat and just reconfirming their bid. And, again, sometimes you just have to feel the flow and try to keep people in the process — to continue to invest in the process, and give them the ability to increase their price later on in the process.

You know, I was informed largely on this one based on what the acquirer constantly said: “No one can pay more than us. We can create the most value. We want this deal.” They were particularly difficult to deal with. And they were the acquirer I went to first with the $2.1 billion SEK counteroffer. And they laughed at me, actually. Literally — if you look at this email above — I literally sent this over to them, and they laughed at me. But within a few days, they were ultimately the prevailing bidder here. I mention this because it’s important for sellers to actually be actively involved in the process with their advisors and have these conversations. And if something in your gut tells you to do something different, like, bring it up. But at the end of the day, I do respect clients who can listen to reason and see the value that their advisors — if they have a sophisticated advisor — can bring to the table, and override these sorts of decisions.

Because, believe me, there was nothing more that I wanted to do than boot these guys. When they reconfirmed their bid before management, I wanted them out. I would have loved to call them and say, “You’re losing. You’re out. You’re done. You’re out of the process.” But at the end of the day, I have to think about what’s the greater goal. And that’s all about, like, the whole emotional detachment from this. Now, as an advisor, you can sit down and listen to your client, who is disappointed, who’s pissed that they reconfirmed their bid — that they didn’t increase their bid — and now we’re going to sit down with them and waste time with the management meeting? No, those guys can piss off. And you have to stand back and look at the bigger picture and say, “Okay, unfortunately, we’re sending the wrong signal now by allowing them to come in. But it’s potentially more of a negative for us if they’re out. So let’s let them ride, and let’s try to correct our mistake of providing them information that displays any sort of weakness later in the process.” And that’s what we did.

It’s the cool, detached warrior who wins, not the hothead or the seeker of fortunes. In almost every deal I do, my clients are typically perpetually pissed with the other side, right? They get offended by the offers. “These guys should be offering more, paying more, doing this, doing that.” As an advisor, you really need to remain cool, calm, and collected. It’s important to discipline acquirers who violate your rules, but don’t do it out of vengeance. Don’t do it out of spite. Do it to retain the construct of your process, if you believe it’s the right thing to do. And, again, that’s where you have to use judgment that you learn over time.

This Nomor transaction was obviously very interesting for me. It was the first time that I ever used a Dutch auction in a process. I found it to be fascinating. I’m a big fan of auction theory, although it’s not always applicable to M&A. But that Nomor transaction was nominated and ultimately became the finalist for European Transaction of the Year, back in 2019. And then, of course, subsequent to its sale to ServiceMaster, when Rentokil and Terminix merged, I got to sell that business again. So, a couple of years later, I was on the sell side and sold a portion of Nomor once again to another acquirer.

Thank you for joining me today as I reminisce on the tale of Nomor. For you M&A advisors out there, I hope you learned a little something to help you tighten your game. And for you sellers, we love to kill it for our clients. In fact, we work with many of our clients years in advance of an ultimate sale. Don’t hesitate to reach out to me on the contact form below, or join me on LinkedIn. Further, we’ll be building on this series, so I invite you to subscribe. And finally, for those of you who have not watched the first part of this series, you can watch it on the link below. Thanks for joining me today, and I’ll see you on the next one.