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: Imagine you run a specialty food brand — let's call it Good Grain — doing about $50 million in revenue, growing 20 percent year over year, profitable, clean balance sheet. You want to sell. You hire a boutique investment bank, they run a quiet process, and two private equity firms bid. The highest offer is $320 million. That's a good number — six and a half times revenue, twelve times EBITDA. But here's the twist: you also file confidentially for an IPO on the same day you enter exclusivity with the top bidder. Luna: You're running a dual-track auction. And I've heard about this in big tech — the DoorDash and Instacart stories — but you're saying mid-market brands do this too? Lucas: More and more. The dual-track auction — simultaneously preparing an IPO while negotiating a sale — has moved from the billion dollar plus realm down to companies worth $200 million to $500 million. The logic is brutally simple: the threat of a public offering forces the buyer to pay more, because if they don't, you can go public and let the market set the price. Last year, a real specialty food company — I won't name it because the deal hasn't closed yet — ran a dual-track and got a 22 percent higher offer than the initial best bid. Luna: Twenty-two percent. On a $400 million deal, that's almost $90 million extra. I can see why founders are curious. Lucas: And if today was actually useful to you — if understanding how a dual-track works, or how a founder can protect their downside, moves your own work forward in some small way — the way these conversations stay ad-free is listener support. People who get value from the show keep it going at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a low-key thing — no tiered memberships, no bonus episodes. Just a coffee-equivalent from people who find the deep dives worth it. I'm a listener too, and I see the difference it makes to have no ads. Lucas: Exactly. So back to the dual-track. The reason it works is that a sale process and an IPO process are structurally similar. Both require an offering memorandum or an S-1, both need audited financials, both involve management presentations, both depend on telling a growth story. The marginal cost of running both in parallel is maybe $200,000 to $500,000 in legal and accounting fees — which is trivial compared to a 20 percent bump in valuation. Luna: But there has to be a credible threat. If the company isn't big enough or doesn't have the right growth profile, the buyer just calls your bluff. Lucas: Exactly right. A dual-track only works if the IPO is genuinely plausible. The company needs at least $30 million in revenue, growing above 15 percent, with a clear path to profitability if not already profitable. It needs a board that's willing to go public. And it needs an underwriter — a bank like Goldman or Morgan Stanley or a boutique like William Blair — that will actually file the confidential S-1. If you don't have those pieces, the buyer sees through it. Luna: So the investment bank you hire to run the sale is the same bank handling the IPO prep? Or do you need two banks? Lucas: It's usually one bank acting as the lead advisor on both tracks. They have a conflict — they want to close a deal because that's where the fee is — but the dual-track structure actually reduces their conflict because they can't lowball you on the sale side without risking you walking to the IPO. The bank gets paid either way, so they're incentivized to maximize whichever track wins. Luna: I've read that some banks charge a retainer specifically for the dual-track — like a monthly fee to keep the IPO ready. Is that common? Lucas: It's becoming more common, yeah. A typical retainer might be $50,000 a month for three to six months, covering the S-1 drafting, the financial modeling, the roadshow prep. That's on top of the success fee — which for a sale is usually the Lehman formula: one percent of the first $100 million, half a percent of the second $100 million, and so on. For an IPO, the underwriting spread is around 5 to 7 percent. So the bank makes more on an IPO, but it's riskier because the deal might not price. The dual-track lets them hedge. Luna: Let's talk about what happens in practice. The investment bank starts the sale process, gets initial bids, and then — what — they announce to bidders that the company has also filed for an IPO? Lucas: They don't announce it publicly. The confidential S-1 filing is with the SEC but it's not visible on EDGAR until the company decides to go public. Instead, the bank tells the bidders, in a carefully worded phone call: 'We want you to know that the company has taken steps to prepare for a public offering, and the board is evaluating both paths. We'd like your best and final offer by next Friday.' That's it. No threat, no bluff. Just a fact. Luna: And the bidders know that if they don't raise their price, the company might go public and they lose the deal entirely. That's the pressure. Lucas: Exactly. And it works because strategic buyers and financial buyers both hate losing. A private equity firm that has spent six months doing due diligence, building a model, getting internal approval — they don't want to walk away empty-handed. So they often increase their bid by 10 to 25 percent. I've seen a case where the initial bid was 11 times EBITDA, and after the dual-track trigger, the final bid was 14 times. Luna: That's a huge jump. But there's a risk: what if no buyer bites, and you're left holding an S-1 with no takers? Then you have to go public in a market that might not want you. Lucas: That's the real danger. If the dual-track fails on the sale side and the IPO market sours — say the Fed raises rates or a competitor IPOs and tanks — the company can be stuck. The S-1 is public, the financials are out, your competitors see your margins, and you've burned the confidentiality that made a quiet sale possible. I know of a healthcare services company that tried a dual-track in 2024, got no acceptable sale offers, then pulled the IPO because the market was weak. They ended up selling eighteen months later at a 30 percent discount to the initial bid they'd rejected. Luna: So the dual-track is a leverage tool, not a guarantee. And it only works when the company has a genuinely attractive growth story. Lucas: Right. And the growth story has to be one that public markets reward. That usually means recurring revenue, high gross margins, and a large addressable market. A specialty food brand with 40 percent gross margins and distribution in 10,000 stores — that's a story public markets understand. A consulting firm with lumpy project revenue — that's harder to sell to IPO investors. Luna: What about the timing? The dual-track adds months to the process. Doesn't that risk buyer fatigue? Lucas: It can. But the best-run dual-track processes compress the timeline. The bank starts IPO prep before the sale process even begins — they draft the S-1 in parallel with the confidential information memorandum. Then when they launch the sale, they already have a draft S-1 ready. That can shave two to three months off the timeline. The whole dual-track might take five to seven months from start to close or pricing, versus three to five for a pure sale. Luna: I want to talk about the founder's psychology. If you're the founder, you've spent years building this company. You're emotionally attached. The dual-track forces you to commit to two exit paths simultaneously. That's mentally exhausting. Lucas: It is. And I've seen founders struggle with it. On the sale track, you're meeting with private equity firms who ask about cost-cutting and synergies. On the IPO track, you're presenting to analysts who ask about long-term market share. The founder has to live in two different narratives. I've seen a founder break down in tears during a dual-track because they felt like they were betraying their team by even considering a sale. Luna: That's real. And it's why a good investment banker is worth their fee — they help the founder compartmentalize. But there's also a structural question: who gets paid first if the dual-track fails? The bank? Lucas: The bank gets paid for their time via the retainer. The lawyers get paid. The accountants get paid. The founder and the management team get nothing if there's no deal. That's a critical point: the dual-track is expensive, and the cost is borne by the company. If the process fails, the company has spent maybe $1 million with nothing to show for it. So the decision to go dual-track has to be made with eyes wide open. Luna: But when it works, it's transformative. I'm thinking of the specialty food brand you mentioned. Can you walk through the numbers? Lucas: Sure. Good Grain had $50 million in revenue, 20 percent EBITDA margins, so $10 million in EBITDA. The initial bid was $320 million — 32 times EBITDA, which is high for food, but they had strong growth. After the dual-track trigger, the final bid was $390 million. That's $70 million more. The bank's fee on the sale was maybe $2.5 million. The legal and accounting costs were $400,000. So net to the founder, after taxes and fees, maybe $50 million extra. That's life-changing money for most entrepreneurs. Luna: And the founder could have sold at $320 million and been happy. But they asked the right question: 'What if we can do better?' The dual-track gave them the answer. Lucas: That's the core lesson. The dual-track is not magic. It's a strategic option that requires preparation, cost, and nerve. But for the right company — growing fast, with a credible public story — it can unlock 20 percent more value. And in a world where acquisition multiples have been compressed by higher interest rates, that 20 percent matters more than ever. Luna: So if you're a founder listening, and you think your company might be a candidate, what's the first step? Do you call an investment bank? Lucas: First, get your financials in order. Make sure you have three years of audited statements, a clean cap table, and a realistic valuation expectation. Then talk to two or three boutique banks that specialize in your sector. Ask them: 'Have you run a dual-track before? Can you show me examples?' If they can't, find another bank. The dual-track is a specific tactic — you want a banker who's done it, not someone learning on your dime. Luna: And if you're a buyer listening, you need to know that the dual-track is coming. If a target company suddenly hires a new CFO or starts talking about 'exploring strategic alternatives,' it's time to ask whether they're preparing an IPO in parallel. Lucas: Smart buyers do exactly that. They ask directly: 'Are you running a dual-track process?' And if the answer is yes, they have a choice: pay up, or walk. Some buyers walk because they don't want to be in an auction. But others see it as a sign that the company is well-run and has options, and that actually increases their conviction. Luna: It's a fascinating dynamic. The dual-track doesn't just affect price — it affects the relationship between buyer and seller. Lucas: It does. And it's a sign that the M&A market is maturing. Founders are more sophisticated, banks are more creative, and the old model of a single-bid, single-buyer process is becoming less common. For operators who want to maximize value, understanding the dual-track is no longer optional — it's table stakes. Luna: I'm thinking about the next five years. If IPO markets stay volatile, will the dual-track become the default process for companies above $200 million? Lucas: I think so. The dual-track gives the seller an option — and in an uncertain market, options are valuable. The cost is real, but the upside is larger. And as more founders see their peers walk away with 20 percent more, the dual-track will become harder to ignore. The question is not whether to use it, but whether you're ready for it. Luna: And that's the kind of strategic thinking that separates a good exit from a great one. Lucas: Exactly. So if you're building a company, keep the dual-track in your back pocket. It might be the difference between selling for a good number and selling for a great one.