7 Reasons A Business Auction Could Be Your Best Exit Strategy

Leveraging a business auction could be the best exit strategy that gets you top dollar value. Auctions have different dynamics from conventional sales, but they’ll ensure that you don’t walk away leaving money on the table.

Before we dive into why business auctions are a great option, understand that this strategy is suitable for mid-market companies. Market categorization is reliant on a company’s annual revenues. If it earns $5M and $50M, the company falls in the lower middle market bracket.

Companies earning $50M to $500M per year are in the midsection. Larger corporations earning from $500M to $1B and above are in the upper tier. Depending on the company’s revenues, you’ll target the appropriate category of buyers.

Also, know that a business auction works best for premier companies that are unique. For instance, boasting of a disruptive product portfolio, exceptional IP, or a top-notch skill set. Prospective buyers may want to purchase the company to access the IP or as an acquihire to take on the team.

The biggest factor that works in your favor is that the buyer is well aware of multiple contenders for the company. This factor alone can push up the prices and entice buyers to offer higher pricing.

But that’s not all. Business auctions or competitive auctions for companies have several other benefits. Let’s take a look at what they are.

1. Competitive Bidding is an Advantage for the Seller–Better Bargaining Power

Multiple bidders in the business auction ensure competition. When buyers know that the seller can choose from the best prices made available, they are likely to offer higher value. In a one-on-one sale, negotiations are bilateral and restricted to the two dealmakers at the table.

Your M&A advisor or investment banker will conduct a detailed survey of the market to create a buyer list. This tactical approach builds a competitive environment that maximizes your bargaining power. Typically, the number of bidders and the entities bidding for the company is confidential information.

This factor encourages them to offer a higher price than in a direct buyer-seller negotiation. The FOMO factor works well in business auctions particularly if the company has exceptional features that will bring value to the buyer.

2. Buyer Perception Adds Value to the Company

The company’s value is not just an aggregate of its tangible assets, financial statements, inventory, and product portfolio. Its market value is also about intangible assets such as customer loyalty, IP, goodwill, brand value, market presence, and more.

Business auctions unlock yet another asset–buyer perception or the value buyers are willing to pay based on their perceptions. Prospective buyers may base their perceptions on the potential profits and growth the company can generate in the future.

During the auction, different buyers may perceive the company as a strategic fit for collaboration and may place bids accordingly. For instance, a company subscribing to your brand’s software may be willing to pay a higher price to acquire the software.

On the other hand, another buyer may want to take over the team generating the software IP. And the potential returns they can earn. Yet another buyer may own a software company and want to purchase the company. Their objective could be a strategic collaboration to capture a bigger market share.

All three buyers have different market perceptions according to their objectives from the acquisition. The pricing structure they offer will depend on the value they hope to gain from the integration. From the seller’s perspective, you’ll choose the highest bid or one with terms that match your needs.

Ultimately, differing perceptions enhance the company’s value even further since each buyer is open to offering a higher price.

3. Sellers Control the Bidding Process–Retain Confidentiality

Business auctions put the founders in the driving seat. You’ll structure the entire auction and work out the information you want to share with buyers. The initial outreach need not reveal in-depth details other than what buyers absolutely need to know.

One of the biggest downsides of a conventional sale is the risk of revealing company secrets to competitors. Typically, buyers operate within your industry and are looking at strategic alliances within the supply or distribution chain.

Giving up proprietary information lets buyers have the upper hand. You can avoid this situation by engaging in an auction instead. Further, you can select buyers who are actually interested and give out information only to them.

Whatever disclosures you provide are carefully controlled and delivered at different stages of the auction process. Using a virtual data room adds an extra layer of protection and secures the data making it available to a targeted group of people.

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4. Business Auctions Close Within a Fixed Timeline

Most importantly, you’ll structure the auction according to the timeline that works well for you. Having completed the outreach program, your M&A advisor will set a deadline for receiving bids and assessing them. Since buyers know that the seller has multiple bids, they are anxious to send offers.

Auctions also have strict milestones that dealmakers must adhere to. In conventional M&A deals, buyers may take their time evaluating the acquisition before putting forward an offer. The sense of urgency is missing. A business auction pushes buyers to place bids before competitors snap up a great deal.

Business auctions also have set deadlines for completing the due diligence investigation. This process can sometimes take months to complete since, understandably, buyers want to be thorough about the discovery process.

But, the pressure to close the deal eliminates unnecessary delays in making an offer. Buyers stand to lose not only a viable deal but also the money and resources they spend on the due diligence.

5. Sellers Can Create the Definitive Agreement

Business auctions allow the founder to create the first draft of the definitive agreement. By presenting the sale terms and conditions, you’re better positioned to get a favorable deal. This advantage allows you to negotiate the payment terms, such as cash and non-cash considerations.

These can include stock, percentage of future revenues or profits, royalties, contingency payments, or rights on intellectual property. You can also bargain for a combination of cash and non-cash payments.

6. A Business Auction Raises the Chances of a Successful Sale

With the advice of your M&A advisor, you’ll carefully structure every step and milestone of the auction. This plan demonstrates clarity and precision in the proceedings which ensures a successful closing. In conventional sales, it is not unusual for negotiations to reach the LOI stage and then fall through.

When such situations arise, sellers end up wasting time, particularly when they’re anxious to close the deal. With auctions, you won’t need to negotiate the letter of intent stage. Instead, you can skip this step and move on to drafting closing documents.

Typically, only serious buyers are likely to enter into the bidding process. The Confidential Information Memorandum (CIM) ensures that only interested parties stay in the race.

7. Auctions Add Validation to the Company

Since the company has multiple buyers, that factor adds market validation to the viability of the acquisition. You can expect to receive more realistic offers based on the company’s market value validated by external channels.

Buyers are more confident about bidding for a company since they know that others have evaluated it and consider it a great buy.

Pitfalls to Watch For

Although a business auction is an excellent approach to inviting bids and selling for the highest value, it has downsides. Understanding them will help you plan workarounds to navigate them. Here’s how:

Your Company and Business Vertical

Running an auction is not suitable for all business and vertical types. For instance, if your company’s structure is complex or you operate within a specific niche market. Further, smaller industries where there are a limited number of bidders are not a good fit for auction sales.

In that case, you’ll opt for conventional sales processes where your M&A advisor screens the market for a buyer. Going in for the traditional M&A deal is a better option.

Regardless of the channels you use to exit, you should know how to value your company. Check out this video in which I have explained in detail how it’s done.

Costs and Preparation

Auction processes are complex and need careful structuring, which is why you’ll incur high costs for organizing them. You’ll also retain a team of professionals to run the procedure which may also increase in complexity according to the company’s structure.

This team will comprise an expert M&A advisor, lawyers, and accountants who will help you draft the initial information memorandum. Next, you’ll assess the bids before narrowing down a list of buyers.

These entities will enter into a confidentiality agreement after which they receive the process letter and the information memorandum. The process letter reveals the milestones of the process including timings, procedures, and the next steps.

Bidders must then submit a non-binding indicative bid which you’ll assess. Only then can the next round of bidding start where buyers receive additional information so they can start the due diligence process.

These steps need time and resources which you’ll invest before the deal closes. Including these costs in the final price could drive up the final deal value you’ll expect. Your objective will also be to cover the initial auction expenses.

You’ll also factor in the fees payable to the professionals you retain. Their charges will be higher than the costs for a conventional M&A, particularly for legal consultants. You’ll need their services for drafting the legal documentation according to relevant regulations.

Keep in mind that the standard documents you prepare for the business auction may not be suitable for all buyers. If that happens, you’ll create customized paperwork that could drive up the final prepping costs.

Regulatory Compliance

When assessing the auction bids, you’ll ensure that the transaction will not violate any competition or anti-trust concerns. For that, your legal team must evaluate the market share the buyer will command post-acquisition.

You’ll also want to research any other approvals you need from local, state, and federal authorities to proceed with the transaction. Also, check for any third-party liens or consent requirements that can delay or derail the purchase. And other regulatory compliance the deal must adhere to.

Effects on Employee Morale and Stakeholder Confidence

Information about the company’s impending sale can have a detrimental effect on employee morale. You also risk losing customers’ and stakeholders’ confidence if information about the auction is opened to the market. Factors like these can bring down the company’s pricing.

You also risk the company’s reputation and brand value if the business auction is unsuccessful. Particularly, when you attempt to sell the company again in the future. Chances are that finding buyers or getting a good price becomes more challenging.

To get around this problem, make sure to restrict information about the sale to a selected group of people. Once the transaction is closed, assign the task of managing the workforce to an expert HR team.

Also, organize the sale announcement through official press releases carefully highlighting the benefits of the collaboration for customers and other stakeholders.

Selecting the Wrong Bidder

A business auction need not necessarily work to your advantage. For starters, the element of FOMO may prompt bids from buyers even if they are not a good fit. You may end up selecting the highest bid even if it is not viable. Or, in the best interests of the company.

Although revealing limited information protects the seller and the company’s secrets, the buyer’s binding offer may prevent an informed decision. Consider revealing all the relevant details under a Non-Disclosure Agreement to ensure the success of the company sale.

The Takeaway!

A business auction is a great solution when you’re looking to sell your company for the highest price. The process ensures that you have complete control over the proceedings when it comes to selecting the best bids.

You’ll control the information you give out and ensure that the sale concludes within a pre-determined timeline.

At the same time, you’ll watch out for the potential pitfalls and look for workarounds to the problems. Ultimately, your goal should be to sell the company to the best buyer who can ensure its continued success. Aim for seamless integration and strategic collaboration.

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