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: There's a moment in every founder's life where they realize their company is worth more than anyone's offering. Luna: And usually that's the moment they start thinking about a dual-track auction. Lucas: Exactly. Today we are digging into one of the most underused tools in the mid-market playbook: running an IPO and a sale process at the same time. Luna: If today was actually useful to you, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that keeps us independent. Let's get into the mechanics. Luna: So what does a dual-track actually look like on the ground? Lucas: You hire an investment bank, prepare two sets of materials — an IPO prospectus and a confidential information memorandum for buyers — and run both processes in parallel. The classic example is a family-owned industrial coatings company we'll call 'ChemCoat,' based in the Midwest, about 400 million in revenue. Luna: And they did this around 2024, I think? Lucas: Right. The owners wanted liquidity but didn't want to leave money on the table. Their bank told them: 'If we go to market with an IPO filing, every financial buyer in the space will know you have a credible exit path. They'll bid higher or risk losing the asset to the public markets.' Luna: And did it work? Lucas: It did. The IPO roadshow valued the company at roughly 1.8 billion, but after three rounds of bidding from three private equity firms and one strategic, the winning offer came in at 2.25 billion — about 25 percent above the IPO midpoint. Luna: That's a massive premium. What drove it? Lucas: The credible threat of going public. The PE firms knew that if they didn't pay up, the company would just complete the IPO, and they'd lose access to a high-quality asset. The dual-track creates scarcity in a way that a traditional auction doesn't, because the seller has a real alternative. Luna: But doesn't that cost a fortune? I mean, filing an S-1 with the SEC, legal fees, roadshow preparation — that's millions. Lucas: It is expensive. For ChemCoat, the bank estimated the incremental cost of the IPO track at about 8 to 10 million dollars. But when the final purchase price came in 450 million above the IPO valuation, that's a 50-to-1 return on the extra spend. Luna: So it's a hedge that paid off. But I'm guessing it doesn't always work. Lucas: No, and there are real risks. The biggest one is confidentiality. When you file an S-1, your financials become public. Competitors see your margins, your customer concentration, your cost structure. If the sale process falls through, you're now a public company with all the quarterly pressure and no liquidity event. Luna: That's a nightmare scenario — stuck as a public company when you didn't want to be. Lucas: Exactly. And that's why most dual-tracks are timed carefully. Typically, you file the IPO confidentially under the JOBS Act, which lets you keep the filing secret for a while. Then you only go public with the filing if the sale process is stalling. Luna: So the IPO is more of a threat than a destination? Lucas: For many mid-market companies, yes. The real goal is to get financial buyers to bid as if they were strategic. Because financial buyers — private equity firms — usually pay less than strategics because they need a certain return. But when a dual-track is in play, they'll stretch their valuation because they fear losing the asset. Luna: Is there a risk of alienating bidders? If I'm a PE firm and I know you might go public, do I even bother showing up? Lucas: Some firms drop out early. But the ones who stay tend to be serious. The bank managing the process will often create a 'staple financing' package — pre-arranged debt — so buyers know they can lever up. That's common in ChemCoat's process: one of the PE bidders used the staple to bid 10 percent higher than their initial offer. Luna: So the bank is effectively engineering the highest possible price. Lucas: They are. And they get paid on that higher price — a success fee usually around 1 to 2 percent of enterprise value. So their incentives are aligned with the seller. Luna: What kind of companies are best suited for a dual-track? Lucas: Companies with predictable cash flows, a defensible market position, and clean financials that can withstand public scrutiny. Also, it helps if the owner is willing to stay on as CEO post-exit, because that signals stability to both IPO investors and acquirers. Luna: But what if the owner just wants to retire? Does that kill the dual-track? Lucas: It makes it harder. In ChemCoat's case, the founder was 72 and wanted to step back. The bank brought in a seasoned operator as a CEO candidate before filing. That gave buyers confidence that the business wouldn't skip a beat. Luna: So you're essentially selling a story: 'You can buy us, or you can watch us succeed in the public markets.' Lucas: That's the whole game. And it works best when the IPO market is receptive. In 2024, we had a reasonably open IPO window for mid-cap industrials. In a year like 2022, when IPOs were frozen, dual-track loses its credibility. Luna: So timing matters tremendously. Lucas: It's everything. The bank will advise on market windows — they have IPO calendars, they know which sectors are hot. If the window is closed, they might recommend a single-track sale or just wait. Luna: Let's talk about the actual timeline. How long does a dual-track take? Lucas: Typically 6 to 9 months from mandate to close. The first 2 to 3 months are preparatory — cleaning up financials, drafting the CIM and the S-1, selecting the management team. Then you launch both tracks simultaneously. Offers come in around month 4 or 5. Luna: And the seller can decide at that point which path to take? Lucas: Yes. Usually the board sets a valuation floor — say, 2 billion — and if the sale offers exceed that, they proceed with the sale. If not, they push the IPO button. The flexibility is the whole point. Luna: Are there any famous failures of the dual-track? Lucas: One notable one was a specialty chemical company called 'Polymer Solutions' — I'm changing the name — that filed for IPO in 2021, got a lukewarm reception, and then tried to sell privately. But the S-1 had revealed that their largest customer was 40 percent of revenue. Buyers used that to negotiate a 15 percent discount. The founder ended up selling at a price below what he'd been offered pre-filing. Luna: Ouch. So the confidentiality risk is real. Lucas: Very real. That's why some advisors recommend a 'dual-prep' instead — prepare both sets of documents but only file the IPO once you have a term sheet from a buyer. That way, you never expose dirty laundry unless you have a safety net. Luna: That seems like a smart middle ground. Lucas: It's becoming more common. The cost is similar, but you avoid the public filing risk. However, you also lose some credibility — buyers know you haven't actually filed, so they may not take the IPO threat as seriously. Luna: So it's a balancing act: full transparency versus bargaining power. Lucas: Exactly. And the best advisors calibrate that based on the buyer pool. If there are 5 strong financial buyers, you might not need to file at all — just hinting at a dual-track can be enough to get aggressive bids. Luna: I want to ask about the role of the law firm. In a dual-track, you need securities lawyers for the IPO side and M&A lawyers for the sale side. Do they conflict? Lucas: They can, which is why many sellers hire separate firms. The securities lawyers are pushing for full disclosure; the M&A lawyers are worried about giving away negotiating leverage. You need a strong lead partner who can manage that tension. Luna: And the bank? How do they avoid conflicts of interest? Lucas: Reputable banks have an internal 'ethical wall' between the IPO team and the M&A team. But in practice, both teams report to the same senior banker, so the seller's interests are aligned. The bank gets paid on whichever path closes. Luna: That's reassuring. So for a founder listening right now, what's the one takeaway? Lucas: If you think your company could be a public company — if you have audited financials, a solid management team, and a growth story — then a dual-track is worth exploring. But don't do it just to squeeze an extra 10 percent. Do it because you genuinely have two good options. Luna: And if the IPO window is closed, you're just wasting money. Lucas: Right. The dual-track is a luxury of a hot market. In a cold one, it's a distraction. But when it works, it can transform a founder's exit. Luna: Well, I think we've given our listeners a lot to chew on. Thanks for the deep dive, Lucas. Lucas: Thanks, Luna. And to our listeners — if you found value here, consider supporting at buy me a coffee dot com slash fexingo.