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 you're a founder running a decent-sized consumer brand — maybe forty million in revenue — and you've decided it's time to sell. The obvious question is, who do you call first: a strategic buyer — a bigger competitor who could fold you in — or a private equity firm that sees you as a platform for roll-ups? Luna: And the answer, for a lot of deals above twenty million, is both. Simultaneously. That's the dual-track auction. Lucas: Exactly. The structure has been around for decades, but it's become the default playbook for investment banks running controlled auctions in the mid-market. The logic is simple: two types of buyers value assets differently, and pitting them against each other forces the side with more synergy to pay up. Luna: Let's ground this in a concrete example. In 2021, Bimbo Bakeries USA — the American arm of the Mexican bread giant — put itself up for sale. It was a big asset, maybe two billion in EBITDA. The bank ran a dual track. Lucas: Right. On one track, you'd have strategic buyers — other food conglomerates like Grupo Bimbo's direct competitors, or maybe a big private-label player looking to acquire scale. On the other track, you'd have large-cap private equity firms like Advent or KKR, who would fund the deal with leverage and plan to grow the business independently. Luna: How does the bank manage the two tracks without creating chaos? Because you're sharing confidential information with a lot of parties who might otherwise be competitors. Lucas: That's the delicate part. The bank builds two separate confidential information memoranda — one tailored for strategic buyers, with more detail on synergies and integration risks, and another for financial sponsors, which emphasizes standalone cash flow and leverage capacity. Both get access to the same data room, but the conversations are walled off. The banker's job is to keep the two groups running on parallel timelines so that binding bids land on the same day. Luna: And then, on bid day, the bank has to decide which track to close. They don't always go with the highest number — there's certainty of financing, regulatory risk, speed to close. Lucas: Exactly. A strategic buyer might offer a higher headline price, but if they need antitrust clearance that could take nine months, the financial sponsor with committed financing and a 30-day close might be more attractive to the seller. The dual track allows the bank to keep optionality until the very last round. Luna: Let's talk about the numbers. How much more does a dual track typically yield compared to a single-track process? Lucas: Academic studies and banker surveys suggest a premium of fifteen to twenty-five percent. The mechanism is simple: when a strategic buyer knows there's a credible private equity bid at, say, ten times EBITDA, they're more likely to stretch to eleven or twelve times to capture the synergies they uniquely can realize. Without that credible threat, they might anchor closer to eight times. Luna: The flip side is that running two tracks is expensive. You need two separate management presentations, two sets of legal documents, sometimes two data rooms. The investment bank's fee is usually higher — maybe one and a half percent of enterprise value instead of one. Lucas: And there's a real risk of alienating one side. If a strategic buyer suspects they're being used as a stalking horse to extract a higher bid from a sponsor, they might walk away entirely. That's why the bank needs to signal genuine interest from both groups — not just go through the motions. Luna: It reminds me of a study by Boone and Mulherin that looked at two hundred and fifty M&A deals from the 1990s. They found that auctions — including dual tracks — generated target returns about twenty-three percent higher than negotiated one-on-one deals. Lucas: That's the evidence. And the logic holds today. But the dual track is not just for billion-dollar assets. It works down to deals of fifty to a hundred million, as long as the seller can afford the advisory fees and the business has enough scale to attract both buyer types. Luna: For a founder-owned company, that's a big decision. You're literally betting that the incremental fee will pay for itself through a higher multiple. Lucas: And it usually does, if the business is well-prepared. But you need a banker who knows how to run the process — one who doesn't let the two tracks blur too early. If a sponsor gets a whiff that the strategic buyer has already won, they'll drop their bid. Luna: A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: That's right. These shows take time to research and produce, and listener support is what keeps them ad-free and independent. Even a small recurring contribution makes a real difference. Luna: Yeah. Now, back to the dual track — one of the most interesting tactical moves is when the seller uses a 'stalking horse' bid from a sponsor to set a floor price before opening the strategic track. Lucas: That's a common variation. The seller negotiates a initial bid from a private equity firm, usually with a breakup fee — say three percent of the deal value — which means if the seller takes a higher offer from someone else, they have to pay the stalking horse that fee. That gives the sponsor some protection for the time and money they spent on due diligence. Luna: Then the strategic buyers come in and know they have to beat that floor. It's a psychological anchor. Lucas: Exactly. And because the floor is already set by a credible sponsor, the strategic buyers can't lowball. A well-structured dual track with a stalking horse has been shown to increase final enterprise value by ten to fifteen percent over a simple auction. Luna: Let's talk about the timeline. How long does a typical dual-track process take? Lucas: From start to finish, about six to nine months. The first two months are preparation — the bank builds the financial model, drafts the CIM, and identifies a long list of potential buyers. Then you have four to six weeks of marketing, followed by an initial round of non-binding indications of interest. After that, the seller invites the top four or five bidders to management meetings and a data room. The final binding bids come in around month seven or eight. Luna: And the seller can decide to close one track early if a compelling offer comes in. But most bankers advise keeping both tracks open until the very end. Lucas: Because the mere fact that another track exists keeps the pressure on. Even if the strategic buyer's initial bid is lower, the banker can go back and say, 'We have a sponsor bid at eleven times, can you do better?' If the strategic buyer believes the threat, they often will. The key is credibility — if the sponsor bid is weak, the strategic buyer will call the bluff. Luna: So the quality of the financial sponsor matters. You can't just bring in any LBO shop; you need a tier-one firm with a track record of closing deals. Lucas: Right. A no-name sponsor won't scare a strategic buyer. But a KKR or a Berkshire affiliate? That gets attention. And the seller has to be prepared for the possibility that the strategic buyer wins — because then the sponsor who spent months on due diligence walks away with nothing but a small breakup fee. Luna: That's the risk for the sponsor side. But they accept it because when they do win, they often get a better price than in a bilateral negotiation — because the strategic buyer pushed the price up, but eventually dropped out, leaving the sponsor to buy at a level that still works for their return model. Lucas: In fact, some private equity firms prefer to participate in dual-track auctions for that reason. They know the strategic buyer will establish a ceiling, and then the sponsor can come in just below it. Luna: But the ceiling isn't always obvious. Sometimes the strategic buyer wins at a price that destroys value for them — the winner's curse. Lucas: That's a real risk. The classic example is AOL's acquisition of Time Warner — a strategic buyer overpaid because they got caught up in the auction dynamics. But that's a cautionary tale for the buyer, not the seller. The seller's job is to maximize price, period. Luna: So if I'm a founder listening to this, what's the takeaway? Should I insist on a dual track when I sell? Lucas: If your business is large enough — say, above fifty million in revenue — and has attributes that appeal to both strategic and financial buyers — recurring revenue, defensible market position, growth potential — then yes, it's almost always worth exploring. The incremental advisory cost is typically dwarfed by the price uplift. Just make sure you hire a banker who has done it before and can manage the two tracks without letting one side feel used. Luna: And be prepared for a longer, more intense process. The dual track adds complexity. But for many sellers, that complexity translates into millions of extra dollars. Lucas: Exactly. It's not the right structure for every deal, but when it works, it's one of the most powerful tools in the sell-side banker's kit. And it's become the standard in the middle market for good reason. Luna: One last thought — the dual track is also evolving. With the rise of continuation funds and gp led secondaries, we're seeing private equity firms themselves become both buyers and sellers in dual-track processes. That's a topic for another episode. Lucas: Absolutely. There's always another layer. For now, if you're thinking of selling, ask your banker how they plan to run the process. If they don't mention a dual track, you might want to get a second opinion.