As you explore the sale of your business, you’ll likely hear that you should consider an auction process. What exactly is an M&A auction, why run one, and when is an auction process not advisable for the situation?
What is an M&A Auction?
An M&A auction process is led by an investment banker with the goal of attracting multiple potential buyers for your business. It’s very structured – going far beyond a few casual conversations with a handful of potential buyers. A proper auction employs rigid deadlines and is intended to result in multiple letters of intent (or even purchase agreement proposals in some cases) – all based on the same set of information. An auction puts power into the seller’s court because competing buyers are forced to put forth their best offers and negotiate in good faith.
It usually works something like this: you and your deal professionals develop a list of potential buyers, typically including strategic buyers (competitors, customers, suppliers and others in your industry), as well as financial buyers (private equity, or for smaller deals, perhaps high-net worth individuals). Your investment banker sends them a “teaser”, or generic description of your business and desired transaction. A buyer who wants to learn more is required to execute a non-disclosure agreement, after which they’ll receive a detailed confidential information memorandum (CIM) describing your business. Your investment banker also communicates deadlines for each step in the process, including initial indications of interest, preliminary access to your data room, management presentations, site visits and letters of intent.
This sounds like a lot of work – and it is. Why engage with multiple possible suitors, especially if you believe you already know who your buyer will be and when you may even have a preliminary proposal on the table? Because when the situation is right, an auction can result in numerous added benefits for the seller relative to non-auction situations.
Why Consider an M&A Auction?
Competition. Several things happen once a potential buyer realizes there will be other possible suitors bidding for your company. First, buyers will self-select in the process, and if they do, they’ll tend to be both motivated and qualified. A buyer’s interest may also be piqued, as an auction suggests that it may be worth fighting for your business (i.e., the process implies your business is valuable). And buyers know they must submit a competitive offer instead of trying to get your business “on the cheap”.
Condensed Timeline. Deadlines keep the process moving efficiently. A single buyer without this time pressure has less motivation to promptly complete their due diligence and get serious about moving toward closing on the actual purchase of your company. Without these deadlines, time is on the buyer’s side – especially if a single buyer’s offer is the only one on the table for you to consider. As a result, your deal may drag on far longer than necessary while the uncontested buyer waits and slow plays things, all the while expecting you to eventually agree to “their” terms.
Superior offers. When multiple potential buyers are competing for your company, there’s pressure to put their best offers on the table (both price and deal terms). It’s possible that a higher value will be placed on your business because with multiple suitors – each with their own reasons to do the deal – there will likely be a few highly motivated potential buyers who bid the price up. You and your deal advisors can also then evaluate various deal structures side by side and, having spent time and resources to assemble a competitive offer, none of the bidders wants to lose!
Likelihood of Closing. The more potential buyers, the more front-end due diligence, the more front-end questions that are resolved quickly, and the more front-end discussions that occur in a condensed time frame. Once you get to the tail end of an auction process, few issues remain unexplored and there is less potential for a last-minute surprise that derails your deal from closing.
Is an M&A Auction Always the Right Move?
Despite its numerous benefits in certain cases, an auction process is not appropriate for every M&A sale transaction. Since the primary advantages derive from having multiple potential buyers interested in your company, it’s important for you and your deal team to take a critical look at your business to evaluate the realistic likelihood it will garner the level of interest that justifies conducting an auction process. For example, is your company well known and of a sufficient size to attract a range of qualified buyers, such as a bona fide private equity or other strategic acquirers with deep pockets that will only buy companies of a certain size and standing? Do you compete in an attractive, growing industry? Do you have a proprietary niche or competitive edge that makes your business especially valuable?
Running a competitive auction is a complex process and you will need deal advisors who have been through it many times. The confidentiality risk is clearly far greater when multiple buyers are involved, and your deal professionals must be versed in handling the risk. The time and expense required to communicate and negotiate with multiple potential buyers needs to make sense vis-à-vis the overall economics of the deal. And it’s worth considering that some qualified buyers could decline to participate in an auction, believing they can strike a more favorable deal in a less competitive transaction.
If your company fits the profile where an auction is likely to yield benefits, it’s hard to argue against conducting the sale through an auction process. While real estate sales aren’t fully comparable to business sales, it’s generally a safe assumption to conclude that fielding offers from multiple qualified buyers in M&A deals will fetch most sellers higher prices for reasons similar to why real estate sellers and their agents work hard to get multiple competitive offers from qualified buyers (i.e., they want to bid up the price and the recent pre-recession real estate boom was a great example of this).
In addition, if an auction is indicated for the sale, you will be testing the market regarding the proper valuation for your business – and in the end, the true value of the company is what the market says it is. From that vantage point, you’ll have confidence you will be evaluating the best offers the market will bear for your business.
About Linden Law Partners
At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we’ve represented buyers and sellers in hundreds of M&A deals. While there are many common threads among the most successful transactions, we recognize the uniqueness and personal attention required for each deal. Contact us to discuss how we can help.