Shortlist

What is a shortlist?

Shortlist (German: Auswahlliste, engere Auswahl) refers to the selection from the longlist that has been assessed against defined criteria and put into a ranking. It contains the investors or prospective buyers who are actually approached in a financing round or a company sale, and it determines the order in which this happens. Drawing up the list is called shortlisting; anyone on it is “shortlisted”. Outside transactions, shortlist generally refers to the narrowed-down selection at the end of a selection procedure, for example in film and literary prizes or in recruitment procedures.

The shortlist marks the end of preparation and the start of outreach. The management, and in a sale the selling shareholders, decide on it together with the transaction adviser. Each address on the shortlist first receives a brief initial summary (teaser); in a sale process, the detailed information material follows once a confidentiality agreement (NDA) has been signed. Because every approach carries knowledge about the company to the outside, the shortlist is at the same time a decision about confidentiality.

Selection criteria for the shortlist

Hard criteria

Hard criteria act as exclusions. An address that fails one of them does not make it onto the shortlist, regardless of its other merits. They include:

• a transaction size that matches the capital requirement or the expected purchase price,
• an investment focus that covers the industry, business model and company stage,
• available funds, which for funds means an investment period that is still running (the phase in which a fund makes new investments) with capital for new investments and reserves for later financing rounds,
• the absence of a conflict of interest, for example through a stake in a direct competitor.

Weighted criteria

The remaining addresses are assessed against criteria that carry different weight. For investors, the contribution beyond capital often counts, such as industry knowledge and access to customers. Added to this are the reputation among founders of earlier investments, the length of internal decision-making paths and access through a personal recommendation.

In a company sale, strategic fit, the ability to finance the purchase price and certainty of closing come to the fore. Certainty of closing includes the question of whether merger control clearances or an investment screening under foreign trade law (Außenwirtschaftsrecht) become necessary and how long they are likely to take.

Order and waves of outreach

The shortlist is rarely approached in full in a single step. Staggering into two or three waves is common. The first wave comprises addresses that fit well but are not among the preferred ones. Their questions show where documents and argumentation need to be sharpened. The second wave contains the preferred addresses, which are then approached with revised documents. A third wave serves as a reserve in case the first two do not generate sufficient interest.

In practice the waves are only a few weeks apart, so that all prospects complete their review at about the same time. Only then are term sheets (heads-of-terms documents in which investors offer a valuation and conditions) or purchase offers available at the same time and comparable. If the outreach drags on for many months, the company negotiates with only one counterpart at a time, which sets the pace and conditions. In a company sale, the auction process takes over this timing through fixed deadlines: first for non-binding initial price offers (indicative offers), later for binding offers.

Shortlist in a company sale

In a company sale, the shortlist is as a rule shorter than in a financing round. Every prospect approached learns that the company is for sale, and this information can reach customers, suppliers and employees. A broad process therefore addresses a larger number of prospects, a narrow process only a few selected buyers whose interest is already foreseeable.

Competitors require particular care. They often pay a high price because they factor in synergies, but would gain insight into customers, prices and staff during the process. If a competitor is included, it receives information in stages. Competitively sensitive data is then seen only by a separate review team (clean team), whose members are not active in the buyer's operating business. The approval of each address by the selling shareholders is documented before the approach.

Worked example: shortlist with weighted scoring

A software company planning a Series A round of EUR 8 million assesses three addresses that have passed the rough filter against five criteria on a scale of 1 to 5. In the first version of the scoring sheet, available funds are only one weighted criterion. The weights are: transaction size 30%, focus and stage 25%, available funds 20%, contribution beyond capital 15%, access 10%.

• Growth fund A with the scores 5, 4, 5, 3 and 2: 1.50 + 1.00 + 1.00 + 0.45 + 0.20 = 4.15 points
• Corporate investment company B (corporate venture capital) with the scores 3, 5, 4, 5 and 4: 0.90 + 1.25 + 0.80 + 0.75 + 0.40 = 4.10 points
• Venture capital fund C with the scores 5, 5, 1, 4 and 5: 1.50 + 1.25 + 0.20 + 0.60 + 0.50 = 4.05 points

Arithmetically, the three addresses are almost level. However, fund C has hardly any free funds left because its investment period is expiring, and would presumably not issue a term sheet. If a minimum value of 3 points is required for available funds, C drops out; A and B make the shortlist. In the case of B, it must additionally be examined whether the participation of a corporate could deter later buyers from its competitor group.

Distinctions: shortlist, longlist, bidder group and exclusivity

• Longlist: the preceding, unweighted collection of all addresses under consideration. The shortlist is its result after filtering and assessment.
• Teaser: the brief initial summary with which the addresses on the shortlist are approached. The shortlist determines who receives it.
• Bidder group: the prospects admitted to in-depth review after indicative offers. It narrows the shortlist once more, usually on the basis of an LOI or an indicative offer.
• Exclusivity: the phase in which negotiations are held with only a single prospect. It ends the competition that the shortlist is meant to create.

Common mistakes

• Started with the most important address. Experience shows that the first conversations serve to sharpen documents and answers. With the preferred address, there is no second first impression.
• Too few addresses. A very short shortlist generates no competition, because even a few rejections reduce the process to a single counterpart.
• One after another instead of bundled. If addresses are approached individually over many months, two offers are never available at the same time.
• Available funds only weighted. A fund without free funds can end up high in a scoring even though it will not make an investment.
• No response deadlines. Without a stated date for responses and offers, the staggering loses its effect.
• Approaches not tracked. Who was approached when and with what status belongs in a continuously maintained overview. Otherwise double approaches and gaps arise.

Frequently asked questions

How many addresses belong on a shortlist?

For a financing round, in practice often 20 to 40, in a company sale usually fewer. What matters is that, after the expected rejections, several prospects are still reviewing at the same time. In sales, the interest in confidentiality additionally limits the number.

How many offers can be expected from a shortlist?

Few. Most of the addresses approached decline in the course of the process. Even two comparable term sheets or offers strengthen the negotiating position considerably, because they make valuation and conditions verifiable.

May prospects be told that further discussions are under way?

Yes, factually and without names. That several addresses are approached is what professional investors and buyers expect. Statements about offers that do not in fact exist, by contrast, are off limits and damage credibility as soon as they are noticed.

What happens with rejections?

They are documented with reasons. If the reasons recur, for example doubts about a key figure or about the valuation, this is a reliable indication of what must be improved before the next wave. Addresses that decline only for timing reasons can be noted for a later round.

When is proof of funds requested?

At the latest before a prospect receives in-depth information. The proof of funds shows that the funds for the transaction are available or have been bindingly committed. For funds with a known, running investment period, a rough check based on public information is often sufficient; for unknown addresses, private individuals and intermediaries, formal evidence is requested, such as a bank confirmation.

The Roemer Capital view

We approach the shortlist within a firmly agreed time window so that feedback, term sheets and offers arrive at the same time. This requires that documents, financial model and data room are ready before the first wave. The effort is worthwhile because several prospects reviewing at the same time move the terms more than any argument at the negotiating table.

In financing rounds, the addresses on the shortlist first receive a teaser of no more than five slides; if they are interested, the pitch deck of 15 to 20 slides follows. In the sale process, we record the approval of each address with the selling shareholders in writing and treat competitors as a separate group with staged information.