If you have negotiated and closed a deal with a single investor, without having systematically canvassed the market, how would you know you have concluded the best possible deal? A competitive process is almost always the preferred way for the owners of a business to attract an investor.

But what exactly is a competitive process? Think of a funnel with various levels: one might approach dozens or hundreds of potential investors to test their interest with a teaser or a phone call.

There might only be 10 to 15 investors who receive an information memorandum, and only a handful who gain entry to the data room. Typically there is only one investor with whom a sale and purchase agreement is negotiated and a transaction concluded.

Where there is extremely strong interest in the company being sold, the competition is not just to see who will be the ultimate investor, but there is competition at each step in the process, as to which investors proceed to the next level – such as which investors receive the information memorandum or proceed to the data room. A competitive process to sell a company resembles a multi-stage auction.

A competitive process has numerous advantages and the first obvious one is that it drives up price. An auction process generally unleashes the competitive spirit of bidders, sometimes driving prices to stratospheric levels, and the effect is no different when a competitive process is applied to selling companies. From my experience in working on the sales of more than 200 companies via competitive processes, the high offer received for any particular company is on average two to two-and-a-half times the low offer.

Why is this? Different investors have different levels of motivation for buying any particular company. Some investors might view the target company as a highly desirable and synergistic strategic investment. Other investors might be "bottom fishers", seeking to scoop up distressed assets.

Competitive process also results in better terms and conditions, which are at least as important as price. A competitive process typically allows the investor to negotiate much better terms and conditions. Very simply, an investor is more motivated to accept the seller’s terms if there are other investors willing to step into his or her shoes.

Where the seller gets to know numerous investors, there are improved chances of finding a more compatible investor – developing a good personal chemistry and assuaging whatever concerns or objectives a seller may have, such as business growth, staff treatment or observation of covenants towards the seller.

The more investors are competing to buy a company, the higher the likelihood that one of them will successfully complete a transaction.

Allow me to illustrate this with an example. Last year, we were in the advanced phases of negotiating the sale and purchase agreement of an energy company when our investor withdrew, due to regulatory uncertainties. No matter, within days the runner up, who had already completed the data room, stepped in to offer a minimal delay in closing. Had there not been a competitive process, it would have taken a minimum of six months to take a new investor through the entire process.

What are the possible limitations or drawbacks of a competitive process? These are few, and usually manageable.
Confidentiality is one concern – by providing more parties with information, the chances of sensitive information leaking out into the marketplace may be higher. However, there are ways of delaying the release of truly sensitive information that can help manage this risk, as discussed in an earlier column.

A competitive process will generally require a greater degree of preparation and more resources. Someone will need to contact dozens, or even hundreds of investors, warm them up to the process, field their questions, arrange the signing of their confidentiality agreements, receive and evaluate their offers and that is at an early stage. At the data room stage, it will be necessary to coordinate access of multiple bidders, field their numerous and penetrating questions, organise meetings with management and site visits, among others.

Many business owners erroneously conclude that the higher degree of preparation for a competitive process means that the process takes longer. The opposite is usually the case: the up-front preparation generally allows the back end of the process to move much faster. Hence, the time during which the company is "on the market" is shorter, minimising the potential for losing clients or staff due to the company being for sale.

*Les Nemethy is the CEO of Euro-Phoenix Financial Advisors Ltd. (www.europhoenix.com), a Central European corporate finance company focused on mergers and acquisitions.