You may have heard it called the “Auction Process” which in an of itself carries a negative connotation. It sounds like a program to sell distressed companies or properties. It is just the opposite. This is a process conducted by professional Investment Bankers (Bankers) to deliver your value proposition to multiple prospective buyers at the same time pitting them against each other in an effort to extract the best price from the best buyer.
The key word here is “Competitive” because this competition accomplishes three things:
- Buyers are aware that others are interested and that they need to offer a premium price to beat out the competition.
- In the end, it assures you that the value of your business has been set by multiple, knowledgeable buyers.
- It should allow you to select your favorite buyer whether or not his offer is the highest.
Everyone would probably agree that these are all important objectives when selling a company.
This is not an “Auction” whereby your name and information are posted somewhere with bidders in a room raising a flag to outbid the last offer until the hammer comes down. Properly conducted, your information is tightly controlled and protected, only allowing serious, capable prospects that you have approved and have signed a Non-Disclosure Agreement to have access to your identity and/or information. None of these know who the other bidders are or how high their bids may be. Properly executed, it is possible to have only one bidder, but extract a great offer from him because he doesn’t see the other horses in the race but he definitely hears the hoofbeats!
While most Investment Bankers believe there is no better way to maximize your value, there are those owners that prefer to minimize their effort and time when selling by avoiding that process and simply wait for the right buyer to come along. That can be a long wait and if that buyer comes along, he knows there is no competition and makes his offer accordingly. Sometimes this preference is based on a business owner friend’s horror tale of a “Busted” auction that did not result in a sale. You minimize that risk by making sure the information you provide is complete and accurate and hire the most professional Banker you can find.
Along these lines, let me interject a big red flag here. I am quite sure you get calls and letters from Business Brokers and some Investment Bankers touting that they represent the perfect buyer for your company. You should first ask them to name this buyer and tell you why they are interested. If they won’t do this and send you an NDA signed by this buyer, then politely take a pass.
Sometimes we hear “Bring me one buyer”. That approach (or something close) can result in a good transaction if properly managed. Your Investment Banker should scour the same list they might have invited to an auction for a handful that they believe would be front runners. From this handful, they try to find the one that is definitely interested in your company. The buyer knows you have hired a Banker to maximize your outcome, so he will assume there is competition (hearing hoofbeats) and makes an appropriate offer. Hopefully, all ends in a good transaction for you. Two things to consider if this is your preferred approach. One is that you and your Banker must assemble the same information for this process that you do for an auction. You simply cannot solicit a valid offer until the buyer knows what he is getting. The other is that there is a much greater risk that this one buyer does not complete the acquisition and you must start this whole process over again.
So, there are pros and cons to the Competitive Bidding process. It is hard work and takes some time and a little money. As mentioned above, there are alternatives to the Competitive Bidding process and if that is your strong preference, be sure to let prospective Investment Bankers know this when interviewing them and see how they would plan to implement your chosen process.