In previous articles I wrote extensively about the merits of competitive processes when selling companies or raising equity. However, as with Latin verbs, there are exceptions that strengthen every rule. So in what situations would a non-competitive process be more likely than a competitive process to result in a successful sale?

The first two situations that might arise are both investor-driven. First, an investor may put such an attractive offer on the table that as the owner you may be tempted to forego other negotiations. Second, an investor may insist that there not be a competitive process, for whatever reason (eg. they are not prepared to engage advisors and undertake the effort of Due Diligence unless they have exclusivity).

If either of these situations arise, you should ask yourself the following questions:

• How sure are you that the offer you have received is truly exceptional (especially if you have not yet received competing offers or a valuation)?

• What is the opportunity cost of your time? How much of a setback will it be if you spend several months negotiating with one party and yet the negotiations fall through for whatever reason?

• What is the opportunity cost in terms of passing up other potential investors? Have other parties been identified? If so, have they intimated a valuation range? Will they still be around and interested in negotiating after several months have passed?

There are, as I see it, three other scenarios which might justify considering a non-competitive process:
The third is where maximization of transaction proceeds is not your objective and you have a particular loyalty to one investor, such as, for example, you want to reward your senior management for a long history of dedicated, loyal service, by selling to them via a Management Buy Out. Under this scenario though, (as with any scenario where you are providing exclusivity), it is important that you be clear with yourself in realizing that you are unlikely to maximize transaction revenues.

Fourth, you may be very concerned about sharing confidential information with a large number of investors. In my opinion, however, there are strategies for dealing with confidentiality in the context of a competitive process in the vast majority of situations (for more details see our article on confidentiality at www.europhoenix.com/library).

Finally, you may have another shareholder with a right of first refusal. This can be problematic, particularly if the wording of the rights make it difficult to sell your interest to third parties, and you may have little choice but to at least attempt a negotiation with the party holding the rights of first refusal. In such cases, the holders of first rights of refusal usually believe that they hold the upper hand in the negotiation and it is a challenge in such situations to strengthen your own negotiating position.

Should you grant any party exclusivity, give careful consideration to the duration of the exclusivity.

You may want to pin them down on a written valuation (eg. in the form of a Term Sheet), and even stipulate that in the event that they attempt to reduce the valuation, the exclusivity may automatically expire.

Having put forward five situations where a non-competitive process might be appropriate, I would still advise business owners to try every means possible to sell your business via a competitive process, particularly if maximization of transaction revenues is among your objectives. If you do close a non-competitive sale process, how will you ever know that there was not another investor out there who would have been prepared to pay more or provide better terms?

In conclusion then, it is best to view a non-competitive process as a fallback situation when a competitive process is not possible.

Parts I and II of this mini-series dealt with the concept of risk as it applies to the valuation of companies and identified a number of risks which investors are sensitive to and which affect their perception of risk. I advocated that anyone wishing to sell his or her company or raise equity should identify the particular risks involved and manage them, to the extent possible, well prior to entering into discussions with potential investors.

This article outlines some of the common steps that owners of businesses can take to manage risk, thereby maximizing valuation, as well as increasing the chances of a successful transaction.

• Managing risk starts with knowing your company well: are there any skeletons in your corporate closet? Try to catalog the ten most important risks facing your company and list them from an investor's perspective. Some examples of types of risk and how you might handle them include:

• Client Risks: If one client accounts for more than 10-15 percent of your sales or a similar percentage of your profits, try to diversify away from that client. Generally, it is in your interest to sign your clients up on long-term contracts, assuming the contracts are favorable.

• Financial Risks: (a) leverage: if your company is highly leveraged, it might make sense to pay down some of that leverage, switch from variable to fixed rate financing or enter into a new, long-term loan with your bank. (b) exchange risk: If your company exports and imports, the chances are that it is has risks associated with currency fluctuations. Would your profits be greatly diminished by a currency fluctuation? Try matching your imports and exports in the same currency, to diminish that risk, or consider purchasing a currency hedging contract.

• HR Risks: Do your best to ensure that your staff are well motivated and planning to stay for the long-term. Do they have adequate financial incentives (eg. bonuses or equity) to ensure that motivation and do they have appropriate non-compete and confidentiality clauses in their contracts?

• Disasters: There are certain types of risk against which it may make sense to insure, such as professional liability or against natural disasters. You may also consider "key man" insurance, which can bring your company cash flow in the event of an interruption being caused by the death or disability of the CEO or another key member of the management teams. Also, you need to ask whether you have an appropriate disaster recovery plan in place, for your IT and other systems.

Of course, any step pertaining to risk management generally also has its costs. You need to carefully analyze the cost/benefit of each risk management option you are considering. If you have not taken steps to deal with certain types of risk, an investor may want to include the costs for risk management into the operating costs of the company when determining the valuation.

One of the best ways to protect yourself is to have your house in order. This helps to ensure the accuracy of financial statements, tax returns and other reporting systems in the company, thereby serving as an early warning system in identifying unusual patterns that could increase your company's risk (from overstocking of inventory to delayed collection of receivables, to name a few). Investors will look at the quality of your systems in diagnosing risks and the capacity of your company to take action (eg. more effort to collect receivables).

I am not advocating that you run a risk-free business. There is no such thing. What I am advocating is that you take the time to systematically identify possible risks and develop strategies for dealing with them. Business is all about taking intelligent risks.