A dual track process is a way of testing two financing alternatives for a company at the same time. For example, a sale, a fund-raising, an IPO (i.e. an initial public offering) or an LBO (a partial buy-out by an investment fund).
Why make a dual track
The dual track process generally takes place at a strategic crossroads. The manager asks himself where he wants to continue his adventure, and then evaluates his options.
Example: George, founder and CEO of a painting company, has achieved most of his objectives with his core business. Today, he’s wondering whether he should sell the business and start a new project to regain the dynamism of the beginning. A friend of his mentioned that if he raised funds from banks, he might be able to buy out his competitors and thus regain the dynamism he was looking for. George then launches his dual track process to evaluate a sale against a capital raising.
What are the Benefits of a Dual Track Process?
A dual track process in M&A provides companies with the flexibility to pursue either an IPO or a sale, maximizing their exit options. By preparing for both simultaneously, businesses can leverage competitive dynamics, potentially driving up valuation as prospective buyers or investors compete. This strategy also enhances negotiating power, enabling management to choose the most beneficial path based on current market conditions, investor sentiment, or regulatory considerations.
Running a dual track offers key advantages in market timing, allowing a company to adapt quickly if conditions shift. Additionally, this process supplies crucial data-driven insights on valuation and market interest, empowering decision-makers with real-time feedback. This flexibility reduces reliance on a single outcome, providing a viable exit strategy even if one option underperforms.
A dual track approach also builds confidence with stakeholders, showing a proactive commitment to maximizing the company’s value. Whether aiming to secure growth capital or align with a strategic partner, this method fosters strategic opportunities, particularly for sectors like technology or life sciences. Ultimately, the dual track process empowers companies to achieve a successful exit, optimizing both financial and strategic outcomes.
What are the Risks of a Dual Track Process?
While a dual track process can increase exit options, it also presents significant risks. Pursuing both an IPO and a sale simultaneously requires substantial resources—from time and capital to advisory costs—placing pressure on management and core business functions. Additionally, market volatility can impact the IPO track, where unfavorable conditions might delay the process or reduce valuation, forcing a shift to a potentially less attractive sale.
Confidentiality risks also arise, as pursuing multiple options increases the likelihood of information leaks, potentially affecting market confidence and inviting competitive actions. This complexity can introduce stakeholder uncertainty, creating concerns among shareholders, investors, and employees that may impact morale and long-term strategy.
Finally, balancing regulatory and compliance challenges for IPO readiness and sale options adds to the workload, making a dual track process demanding both financially and operationally. Strategic planning is crucial to manage these risks effectively.
What are the disadvantages of a dual track process?
As any entrepreneur who has ever carried out an M&A operation knows, such an operation takes up a great deal of time and resources. Secondly, you need support.
Another important point to bear in mind during such an operation is the need to organize the two calendars so that one does not advance faster than the other.
What to look out for before starting a dual track process.
The first thing, if you have investors such as funds or industrialists, is to obtain their support in this operation by consulting them. Even if, in the end, you’re the one who’s going to carry out the operation, the support of your shareholders is very important.
To get their support, be honest with them. Most of the time, company directors who carry out a dual track have a preferred option in mind. Being clear with them will have a beneficial effect in negotiations.
What are the Risks of a Dual Track Process?
While a dual track process can increase exit options, it also presents significant risks. Pursuing both an IPO and a sale simultaneously requires substantial resources—from time and capital to advisory costs—placing pressure on management and core business functions. Additionally, market volatility can impact the IPO track, where unfavorable conditions might delay the process or reduce valuation, forcing a shift to a potentially less attractive sale.
Confidentiality risks also arise, as pursuing multiple options increases the likelihood of information leaks, potentially affecting market confidence and inviting competitive actions. This complexity can introduce stakeholder uncertainty, creating concerns among shareholders, investors, and employees that may impact morale and long-term strategy.
Finally, balancing regulatory and compliance challenges for IPO readiness and sale options adds to the workload, making a dual track process demanding both financially and operationally. Strategic planning is crucial to manage these risks effectively.
Can more than two comparisons be made?
No, doing more than two tests would symbolize a lack of vision for the company on the part of its manager. At that point, it’s best to turn to someone else to buy your company.
Who carries out dual track processes?
All types of company can choose to carry out a parallel comparison. But it’s true that companies that reach a ceiling in their product or monetization are more likely to carry out this type of operation: “Am I raising funds to develop or improve my product, or am I letting a new, industrial-type investor do that development?” It’s often at this point that entrepreneurs may ask themselves this question.
There is also the possibility of evaluating a parallel sale during a potential IPO (initial public offering). The aim being to cash out for entrepreneurs and investors, they may be able to recoup more via an IPO, but more quickly via a sale.
The dual track process is a golden tool for all entrepreneurs wishing to change the course of their business. It enables them to retrieve data on both types of process in order to define the one best suited to their situation.