Sellers often dismiss the idea of selling their businesses by auction. The idea of competitive bidding seems far away from the complex process of negotiating price and warranty terms of a business the seller has spent many years building up. However, handled properly, an auction is far more likely to achieve the best price and terms for the seller, especially in the current market, when deal volumes are low.
An auction may be the best way of marketing the sale of a business. Unless agreed to be confidential, each bidder’s participation can be used to stimulate interest among others. It also enables the directors to demonstrate to shareholders and creditors that they have obtained the best price for the target.
The balance of negotiating power favours the seller and he can use this to significantly improve the price and terms he can obtain as compared to a bilateral sale process where only one prospective purchaser is involved and the balance of power is more evenly balanced.
Disadvantages to the seller include the seller’s costs on an auction usually being higher because lawyers will draft the sale documents, and there may be negotiations with more than one potential buyer.
Also, not all businesses are suitable for sale by auction. For example, if there are few potential buyers, if the structure of the business is particularly complicated or where there are regulatory or competition issues or the need for third party consent.
The additional complexity of an auction process also places burdens on management. More management time is involved, and additional problems can arise if the management is itself a potential bidder or, as in most private equity purchases, will have equity in the acquisition vehicle.
It is also harder to maintain confidentiality because of the sheer number of participants. Some bidders may participate only to fish for information about a competitor. While confidentiality undertakings are intended to deal with these problems, it is not always possible for a seller to enforce these or to discover the source of a leak.
If practicable, the seller should hold back his ‘family silver’ from Round 2 and disclose them to the preferred bidder only in the final stage. But leaving key disclosures so late is also a risk – if the buyer walks away, the target will be seen as soiled goods.