Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How Indie Brands Use Dual-Track Auctions to Get Higher Buyout Prices
Transcript
- Lucas: So let's talk about dual-track auctions. You've probably heard the term if you've been around M&A for more than five minutes. The basic idea: a company for sale runs two processes in parallel — one selling to a strategic or financial buyer, and one preparing for an IPO. The IPO track isn't just a backup plan; it's leverage. The threat of going public forces buyers to bid higher. Luna: Right, because the seller is saying, 'If you don't pay my price, I'll just take this company public and you can compete with a well-capitalized competitor.' That's a pretty credible threat if the business is solid. Lucas: Exactly. And it's not theoretical. A 2023 study from the Journal of Financial Economics looked at 1,200+ M&A deals and found that dual-track auctions yielded a median premium of 22% over single-track processes. That's real money — tens of millions for a mid-sized indie brand. Luna: But coming back to the cost side — preparing for an IPO is expensive. You need audited financials, a prospectus, roadshow prep, underwriters. That could be $5 to $10 million for a decent-sized company. If the sale goes through, you've basically burned that money. Lucas: That's the trade-off. But sellers are increasingly willing to eat that cost because the premium gain often dwarfs it. Let's look at a concrete case: imagine a hypothetical indie hardware brand called Aura Sound — think Sonos but smaller. In 2024, a strategic like Apple comes knocking. Aura's board could do a single-track sale to Apple and maybe get 8x EBITDA. Or they run a dual-track — file a confidential IPO, hire Goldman, start the roadshow. Suddenly Apple's bid jumps to 11x EBITDA because they don't want a competitor with public market capital. Luna: So the IPO track doesn't even have to go all the way? The mere filing is enough? Lucas: Often, yes. The filing is public once it's declared. Buyers see it and realise the clock is ticking. If they want the asset, they bid hard. And here's the kicker: the IPO track can be pulled at any time. So the seller never actually has to go public. They just need the credible option. Luna: That's the beauty of it. But I've seen cases where the IPO track distracts management. The CEO is spending 40% of their time on roadshow prep instead of running the business. If the sale falls through, you've got a distracted team and a stale business. Lucas: That's real. The best dual-track operators have a dedicated team — a CFO or a hired gun — to handle the IPO track while the CEO stays focused on operations. And they set a strict timeline: 'We'll run the dual track for 60 days, then pick a path.' Luna: What about the buyer's perspective? If I'm a strategic buyer and I see a dual track, I might lowball initially to test the seller's resolve. I know the IPO costs are sunk, so I might think the seller is desperate to close. Lucas: That's a risk. But experienced sellers counter by showing strong IPO interest. The bookbuilding process — gauging investor demand — can be shared selectively with strategic buyers to prove the valuation floor. And the seller's banker is key here. They manage the flow of information to keep both tracks credible. Luna: Let's talk about the 2026 market environment. With rates where they are — the ten-year Treasury around 4.5% — IPO windows have been choppy. Does that hurt the dual-track's credibility? Lucas: It does, but it also helps in a weird way. When the IPO market is uncertain, strategics know the seller's alternative is weaker. But a well-prepared company with strong fundamentals can still go public. Look at the Reddit IPO in 2024 — that was a tough market, but they priced at the top of the range because they had a compelling story. Dual-track works best for companies with clear growth narratives, not for turnaround stories. Luna: So who's the ideal candidate? I'm thinking of a B2B SaaS company growing 30% year-over-year with high gross margins. They have a natural buyer like a Salesforce or a Microsoft, but they also have a clean IPO story. Lucas: Exactly. Recurring revenue, high visibility, and a large TAM. The dual-track is particularly effective when the strategic buyer is a logical acquirer but the seller is big enough to stand alone. And here's a stat that surprises people: according to a 2025 survey by the M&A Research Center, 40% of private equity exits over $500 million now use a dual-track process. That's up from 15% a decade ago. Luna: It's become the standard for larger deals. But for smaller indie brands — say, $50 million to $200 million in revenue — the costs are prohibitive. You can't afford a full-blown IPO prep. Lucas: True. But there's a lighter version: a 'mini dual track' where you prepare a mock IPO — a pitch deck, financials, select buyer conversations — without the formal SEC filing. It's less credible, but it still creates tension. And some boutique banks offer that as a service for a flat fee, maybe $200K, rather than a percentage. Luna: Now I'm thinking about the timing. You have to start the dual track at least 4-6 months before you want to close. That's a long runway. And if you're in a fast-moving market, conditions can change. Lucas: Spot on. The best time to start is when your business is peaking — highest growth, best margins. Not when you're in decline. And you need a board that can stick to the plan. Dual-track auctions fail when the board gets cold feet mid-process and tries to pivot. Luna: Quick honest thing — we keep this show ad-free and listener-funded. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what makes it possible to produce deep dives like this. If these conversations have moved your work forward in some small way, that's where you can keep it going. Lucas: Yeah, it's a small group, but it makes a big difference. No pressure, just mentioning it. Back to the dual track — one nuance I want to hit is the role of the termination fee in dual-track deals. Luna: Right, because if you're running two processes, you need to think about what happens if the IPO track wins. The buyer often demands a reverse breakup fee — typically 3-4% of deal value — to cover their costs if the seller backs out to go public. Lucas: Exactly. And the reverse breakup fee is a double-edged sword. It gives the buyer comfort, but it also raises the bar for the seller to actually go IPO. They have to be willing to pay that fee if they choose the public path. In practice, it's usually the buyer who ends up paying a fee if they walk, but in a dual track, the fee can be asymmetric. Luna: Let me throw out a hypothetical to test this. Say you're selling a company for $1 billion. The buyer offers $1.1 billion but demands a 4% reverse breakup fee — $44 million. You think the IPO could get you $1.3 billion. Do you take the sure thing or risk $44 million for a potential $200 million upside? Lucas: That's the exact calculus. And the answer depends on your conviction. If your banker says, 'We have three anchor investors ready to buy at $1.3 billion,' you might take the risk. But if the IPO market is shaky, you take the $1.1 billion and walk. Luna: It's a real gamble. I've seen boards split 50-50 on that. Lucas: Which is why the best dual-track processes involve a 'go shop' clause. Even after signing a deal, the seller can solicit better offers for 30-60 days. That's essentially a mini dual track after the fact. Luna: But don't most buyers hate go-shop clauses? They see it as a sign the seller isn't committed. Lucas: They do. But in a dual track, the buyer knows the seller is running a process anyway. So a go-shop clause is less offensive. It's almost an expected part of the dance. Luna: So what's the one piece of advice you'd give an indie brand considering a dual-track auction today — June 2026? Lucas: Start early. Hire a banker who has done dual tracks before. And be honest about your IPO readiness — if you're not ready to actually go public, the strategic buyer will smell it. The threat only works if it's real. Luna: Good advice. And on that note, I think we've covered the mechanics pretty well. Next time, maybe we can talk about what happens after the deal closes — the integration phase. Lucas: Absolutely. Post-merger integration is where value is made or destroyed. But that's for another episode. Thanks for listening, everyone.