The Selling Process
The four key elements that constitute the selling process are: (i) identification of prospective buyers, (ii) selection of the type of selling process to be utilized, (iii) business reviews, and (iv) negotiation of the transaction and closing the deal.
IDENTIFYING POTENTIAL BUYERS
Identification of potential buyers by the project team initiates the selling process. All activities prior to this step such as the divestment decision, organization of the project team, and preliminary work in preparing the divestiture, have been internal to the selling corporation. The external process begins with the identification of the potential buyers.
The decision to engage or not to engage an investment banker or some other intermediary to identify prospective buyers, is considered or reconsidered at this stage in the divestiture process. The decision to use an intermediary depends on the selling corporation's experience with divestitures, confidence it has in its divestiture team, and the in-house knowledge it has regarding potentially interested buyers. Investment bankers, similarly, can help in the identification of prospective buyers by knowing the types of businesses their clients and their competitors are seeking to acquire, and by having the capability to identify potential acquirers who have not been active in the market, but for whom a particular business may be a good strategic fit. Investment bankers can also qualify potential leads anonymously since usually the selling corporations do not like the prospect of having the business they are divesting characterized as having been widely "shopped".
Potential buyers, in general, can be categorized into direct competitors, companies in similar types of businesses, buyers who want to broaden their product lines, buyers looking for operational economies of scale, suppliers and customers, and others such as companies seeking diversification, holding companies, investment groups, and venture capitalists.
SELECTING THE SELLING PROCESS
There are, basically, four different methods of selling a business, each having its own advantages and disadvantages. The selection of the selling process depends on the nature of the business being sold and the objectives of the selling corporation. The four methods are given as under:
Competitive Bidding: This process helps produce the highest bidder and the best deal structure for the selling corporation, if correctly managed. The process of competitive bidding is most effective when 5 to 10 potential buyers have been identified and when the potential buyer list contains diverse strategic objectives.
Disadvantages of utilizing competitive bidding include the unlikely possibility of an unsuccessful sale that can adversely affect the value and near term viability of the business. Customers as well as the employees view it as a lack of commitment to the business on the part of the selling corporation. Competitors stand to gain significant advantage in such a circumstance. If a competitor has been a potential buyer, it gains significant knowledge about the business, which can be use against the business in the marketplace. Divestitures usually fail due to poor initial planning of the divestiture or due to a badly managed selling process.
Sequential Selling: This method involves establishing a priority list of potential buyers after the identification of prospective purchasers. The selling corporation offers the business to what it believes to be the most likely potential buyer and, if unsuccessful, moves down the pre-established priority list. If successful with the very first potential buyer, this process is obviously a much easier process to manage than competitive bidding. However, there is no market frame of reference available for the price and deal structure that is negotiated and the seller can never know if a better deal could have been struck with someone else. This is an acceptable selling method, if the primary objective is to get out of business with secondary importance being attached to the price and deal structure. However, if the pre-established priority list itself is faulty, it requires the business to be offered to a number of prospective buyers, in sequence, giving the business an image of having been widely "shopped" and rejected. This seriously impairs the potential value of the business.
One Buyer: If, in the process of identifying potential buyers, only one prospective purchaser can be identified, the seller is left with little negotiating leverage. The resulting transaction is hence not likely to meet all of the seller's objectives. In cases where there is a known anxious buyer, the seller should ascertain the value that this buyer sees in the business, and should try and identify other buyers who might see the same value as well. If successful in doing so, a one-buyer divestiture might be transformed into a competitive bidding transaction thereby resulting in significantly better price and terms than could have been possible in a one-buyer transaction.
Going Public: Divestiture of a business through an initial public offering is completely different from selling it through a private transaction. In order to go public, the entity to be sold must have an established history of profits and growth or a proprietary product or service on which a public market price can be based. Also, there should be existing favorable market conditions in terms of appetite for initial public offerings. When considering the divestiture of a business through an initial public offering, even the most sophisticated selling corporations require the assistance of investment bankers.