Stephen McGee of Bigelow explains why selling a private company is fundamentally different from public markets. Buyers are seasoned professionals while sellers are often first-time principals. On one deal, offers ranged from $70 million to $140 million for a company valued at $100 million, showing how inefficient private M&A truly is.
Hi, I'm Stephen McGee with Bigelow. At Bigelow, our practice is exclusively focused on family and founder-owned businesses, helping them build enterprise value and then someday capture that enterprise value through a capital gain transaction. And working with these families and founders like you in the private transaction market, we see tremendous asymmetry. Asymmetry of experience. The buyers of private companies do hundreds of deals in their careers. Most of you will likely do just one. Asymmetry of information. Based on this vast experience, the buyers have access to all the information, world-class experts, market data. They know what is customary in an M&A transaction. For most of you, your knowledge of M&A might be quite limited, based on secondhand information. Sometimes wrong. And lastly, asymmetry of risk, or the principal-agency problem. What do I mean by that? Well, for you, a capital gain transaction will likely be the single largest financial transaction in your lifetime. You have skin in the game. You're a principal. And as such, you're subject to a whole bunch of cognitive biases, which trigger very emotional decision-making. The buyers, they're agents. It's not their money. They approach these transactions as coldly rational objective investors. So because of all this asymmetry, we believe it's critically important for business owners like you to surround yourselves with world-class advisors to help level the playing field. Now most of you likely have a decent grasp on the public equity markets. Stock exchanges are heavily regulated, prices are updated every few seconds, they're completely transparent. They are price efficient, what we would call a buyer beware market. The private transaction market, on the other hand, is candidly more like the Wild West. It's largely unregulated, private companies are not required to file financial reports, and there are no exchanges. It is what we would call a seller beware market. Now, with a couple of clicks, we can all look up the price of our Apple stock, but how much is your private company worth? How efficient is this private transaction market? And who are the buyers in these transactions? Let's take on a few of these questions. Who are the buyers? We tend to think of the buyers in 3 different groups. At one end of the spectrum are strategic buyers. These are companies in your industry or an adjacent industry. At the other end of the spectrum are financial buyers or private equity groups. These are financially motivated investors looking to acquire successful private companies. In the middle of what we would call private equity platforms. These are companies in your industry that have already been acquired by a private equity group, and that private equity group is looking to grow that company through acquisitions. And these different investors vary in many different ways, but perhaps the most obvious way they differ is strategy. Strategic buyers, well, they have a strategy, and it's theirs, and you either fit it or you don't. It's binary. Private equity groups, on the other hand, they don't have a strategy. They're trying to figure out if they like yours, and they want to help you and your team execute on it. And private equity platforms, well, they're somewhat of a hybrid, having elements of both. It's very interesting to me to hear business owners like you talk about these different kinds of investors. There are lots of narrative fallacies and old wives' tales. Strategic buyers always pay the highest price. Private equity companies will load my business full of debt and cut costs. We find there is as much unlearning to do as there is learning. So how efficient is this private transaction market? Let's look at some of our recent data. In this recent Bigelow transaction, we received 13 offers for our client. In this graphic, the strategic buyers are represented by triangles, the private equity groups are represented by squares, and the circles would be the private equity platforms. And you can see the spread of offers is huge. Just to use simple math, if the mean of these offers was $100 million, It means we had some investors valuing our client at $140 million and other investors valuing that same client at $70 million. And let's be clear, these investors had access to all of the same information. It just shows how inefficient the private transaction market is. And this didn't happen just once on this recent engagement. It happens all the time. You'll also notice in that recent transaction that the strategic buyers had the lowest valuations. But hang on a second, I thought they always paid the highest price? This kind of data is incredibly humbling to us here at Bigelow. Candidly, it's why we exist, and it demonstrates just how hard it is to value a private company. And the only way to know with certainty what your private company is worth is to create a market for it. I hope you found this brief presentation helpful, maybe resulted in some learnings and unlearnings. Remember, the private transaction market is full of asymmetry. It's a seller beware market. It's like the Wild West, where emotional principals are pitted against vastly experienced, coldly objective, rational investors. And it's highly inefficient. And the only way to know how much your private company is worth is to create a market for it. If you would like to see more information from Bigelow, please go to bigelowllc.com. And click on the EOM Resource Library.
