InSight

Exit and Growth Strategies for Middle Market Businesses

Auctions vs. Negotiated Sales

By Kim Levin | Jul 26, 2010

Middle-market business sellers have important choices in their divestiture process.  One key choice is whether or not you desire to have an auction OR a negotiated sale.

Sale by Auction is a multi-stage and sometimes complicated process.  The investment banker markets your firm to multiple prospective buyers through potentially more than one round of activity, with successively smaller groups of buyers competing for the purchase.  This process is resource intensive and in difficult M&A markets entails a hint of idealism as well – the belief that your business will be attractive to a relevant number of buyers.  When executed properly, though, an auction will have a positive impact on business value – price and terms.  A side benefit is that it also encourages speed of execution via quick action by buyers.   In the leveraged buyout boom of the 90s, auctions were very common and today are still a preferred method of marketing a business.  Auctions provide a greater degree of comfort that the market has been exploited and is giving the seller a broader set of responses as to value.  Auctions do, however, have their downside.  Even the most astute investment banker who admonishes prospective buyers and ensures they sign strong Non-Disclosure Agreements cannot control how information may be used once it gets into the hands of prospective suitors.  Therefore, auctions can have a negative impact on employee morale if information of a pending sale should leak.  Sometimes bidders may collude as well.  And these variables can ultimately lead to reduced leverage when negotiating once the “winning” buyer is chosen.

A Negotiated Sale is much narrower in scope. It entails direct dialogue with a single prospective suitor.  Of course, negotiated sales ensure the highest degree of confidentiality in a sale process.  They are less disruptive to the business and can provide greater flexibility regarding deal timelines and deadlines.  They can also help minimize “taint” – the potential negative perception in the marketplace if a negotiation fails.  However, they generally provide less seller leverage and competitive tension.  This might result in a seller not extracting full value from their business sale.  Moreover, if the buyer is a direct competitor it may expose important and sometimes proprietary information to that buyer.

Which approach is best for you?  It depends on your desires and the marketplace in which your business operates.  Speak with your CFA professional so that they may walk you through each process (and hybrid approaches) in detail so that the approach chosen optimizes your interests.

posted by John Klearman


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