Hi, it's CJ Gustafson and welcome to Looking for Leverage.

The last couple of issues were about bankers: what you pay them and what you keep paying them after you've fired them. This one is about the first real decision your banker makes on your behalf.

Today’s topic: sequencing potential buyers in a process.

At the kickoff meeting, your banker walks through the buyer list. You see sixty-ish names on two pages. On the first page you’ve got strategics: competitors, adjacent players, a few large companies that have bought in your space before. On page two are the financial buyers, which is a much longer page, because there are a lot of PE firms and they all have money they need to spend (something something dry powder).

While you are looking at the names, you probably aren’t looking at the calendar in the corner of the slide, which says the strategics go out in early March and the sponsors go out in mid-April.

That six-week gap is not a minor scheduling point. It’s crucial for timing so you can get all the people to the bidding finish line at the same time.

Here’s how most operators picture a sale process:

You’d think there’s one list, a starting gun, and a single clock.

But there’s an artful sequencing game going on underneath the surface.

The two halves of your buyer list run on different internal machinery.

A financial buyer exists to close deals. That’s the point of the firm… It’s what they do for a living. A deal partner who likes your teaser can pull a few people into a room and have a point of view within 72 hours. When the first-round bid deadline arrives, they’ll hit it because hitting bid deadlines is a core professional competency for them.

A strategic buyer has a business to run, and buying you is a side project for everyone involved. The bigger ones have real corp dev teams, some are sharp and have run just as many deals as the financial sponsors have, but they don’t get to sign an LOI on their own. The number and terms have to survive a (brutal) chain of approvals.

Even if corp dev is great at analysis, they are still very much beholden to an internal calendar.

So if you launch both halves of the list on the same day, the sponsors bid on time and the strategics either come in late or come in with a placeholder number their own committee hasn’t approved yet. And that hurts you, because the banker uses first-round bids to set the range and stoke competitive pressure.

Now, here’s the part everyone was taught about who pays more.

A strategic can theoretically pay for your business plus what your business does for theirs. It’s called “bidding their synergies.”

Net net: they can hand you some of this 1+1=3 in the purchase price without damaging their own return.

A financial buyer has no operating business to fold you into. Their model is your cash flow, the capital structure, and a forecasted exit multiple predicated on achieving scale in five years. Every dollar of price comes straight out of their return.

That’s the textbook reason strategics clear the field on price, and it held for a long time. It holds less well now, for two reasons.

The first is buy-and-build. A sponsor bidding on a middle-market company today is often not buying a standalone business; they’re buying an add-on to a platform they already own (or plan to use you as the platform). An add-on gets underwritten with synergies exactly like a strategic would underwrite them… i.e., the platform’s back office absorbs yours, the platform’s contracts reprice, the platform’s multiple gets applied to your EBITDA the day you close. A sponsor with a platform in your sector is a strategic buyer too.

The second is that the two sides have moved toward each other due to macro conditions. Sponsors are sitting on committed capital that has to get deployed against a thinner set of quality assets, which makes them bid harder than the old caricature suggests. And at the same time, with higher interest rates and fewer outcomes for legacy tech businesses, Strategics have gotten more careful about their own balance sheets and more honest about integration risk, which makes them bid less freely than they used to.

Nonetheless, the reason to stagger the list survives all of that. Strategics still move slower, and the approval chains that slows them down haven’t gotten any shorter. Despite what they may or may not bid, the head start corrects for speed.

The sequencing buys you something else too. Bankers will often stack the strategic tranche on purpose, putting the names least likely to actually buy you at the front so you get your mistakes out before you hit the big dogs. It’s like deal pre season. Six weeks with strategics is six weeks of live reps. Ideally the questions you couldn't answer in meeting two are softballs by meeting nine. And the data room the sponsors log into is not the one the first strategic saw.

Here’s an illustrative two-track calendar. It spans 10 weeks, driving to one bid deadline.

Remember: Everybody bids around the same day. That’s the goal.

When we ran our process, the weakest part of our data room was our supplier contracts.

We were in a business where the terms we had with a handful of major industry suppliers carried most of the value. Any real buyer was going to price us off those agreements. And our file on them was a mess… originals in one place, amendments in another, a couple of relationships operating on terms that had been agreed to by email and never papered. It was a ten-years ratsnest.

Six weeks gave us enough time to hunt down what was missing and fix it. Our legal and finance teams spent the window rebuilding that folder from scratch, contract by contract, counterparty by counterparty (it sucked!)

The strategics also told us what to fix without meaning to. The corp dev teams that had run twenty processes asked the sharpest questions. Those questions became our punch list. As such, any gap they found in weeks three through six got closed before a single sponsor logged into the room.

By the time the PE and growth equity firms showed up, they walked into a clean room and a story we’d already told a dozen times.

(Footnote: A strategic won the deal).

Wishing you a buyer whose investment committee meets weekly,

CJ

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