An under the tent deal is a business transaction that is not disclosed to the public and is usually known by only a small select group of buyers or a single buyer. There is usually no open auction with multiple buyers seeking to be the best bidder. Instead, the focus is on a few qualified strategic buyers.
Under the tent deals are more likely to happen when company insiders look to buy the company with assistance from a financial backer. The seller may be an organization where a management buyout (MBO) is being considered, with the company’s management reaching out to a private equity firm to obtain capital.
An under the tent deal is a business transaction that is not disclosed to the public and known by only a small select group of buyers or a single buyer.
The deal is more likely to happen when company insiders look to buy the company with assistance from a financial buyer.
Even though an under the tent deal can be kept secret and limit the time and cost that would be needed for public auction, the purchase price for the seller is not maximized, and the deal may not be represented by an M&A advisor.
How It Works
The seller usually presents the sale to financial buyers in a proprietary or captive manner. In such a case, the management team or key employees may offer to gather specific information about the company for the financial buyer or buyers, thus putting them “under the organization’s tent.”
Financial buyers are usually open to management buyouts since the management team is closely familiar with the company’s operations. Hence, the managers can create value by continuing on in the business. The owner of the company may be retiring and has established a competent management team. The seller may also be a large conglomerate that wants to sell non-core assets or divisions.
Reasons for Under the Tent Deals
Under the tent deals are particularly appealing because of the following reasons:
1. To maintain confidentiality
An under the tent transaction often happens when the sellers generally want to keep the sale of the company a carefully guarded secret. Only a few select employees may be allowed “under the tent.” Disclosure of the sale process to the public can influence the business negatively.
For example, some employees can get nervous and even quit while customers or vendors can consider ending their relationships with the seller. Secondly, when an under the tent deal fails, it won’t cause a ripple effect on the value of the company. When a publicly advertised deal fails, other initially interested parties may be turned off. An under the tent deal protects sellers from such an occurrence.
2. To limit expense and time
Since an under the tent deal is disclosed to only one or select few buyers, it limits the expense and time that will be needed to market the business to a number of prospective acquirers. A controlled auction process can also cause significant problems in the case of a management buyout since the management team now becomes one of the competitive bidders for the business.
Disadvantages of Under the Tent Deals
1. Lower purchase price for the seller
Under the tent deals do not usually maximize the purchase price for the seller. Since the sale is not done in a controlled or wide auction, competition is not generated as it would be with many potential buyers, with each looking to make the best offer. As a result, the potential to earn more revenue from an increase in the price of the business is reduced.
2. Usually not represented by an M&A advisor
Since the sale of the business is done secretly or quietly, an under the tent deal is rarely represented by an M&A advisor. Though the cost of hiring an M&A advisor will be avoided, the process can be very challenging, especially if it is the first time. Most business people are busy running their businesses and aren’t involved in such transactions regularly. Hence, they may not be familiar with the various aspects of under the tent deals or M&A transactions.
The involved parties may also have little or no familiarity with recent deal comparables and the market. Working with an experienced professional during any transaction can result in better terms being obtained, higher valuations, and mitigation of risks. By doing the M&A work all by yourself, there will still be additional fees and time needed to prepare and familiarize yourself with the deal.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant CFI resources below: