Auction Strategies: Proven Techniques To Sell Your Business At Peak Value

More and more entrepreneurs are relying on auction strategies to sell their companies at peak values. Auctioning the company means inviting multiple competitive bids and then selecting the option that brings the most value.

Having an experienced M&A advisor on board is always advisable to navigate the process. These professionals can guide you through the steps so you can get top dollar for the company. And, the most favorable terms and conditions.

The biggest defining advantage of running an auction is to leverage the FOMO concept. Competing buyers vying for the company invariably push its price up getting you the maximum worth possible. You’ll choose from different auction strategies according to the types of buyers you wish to approach.

Read ahead for detailed information about how to organize and execute the auction process. You’ll base your decisions on three factors–gaining the maximum value, completing the transaction quickly, and maintaining confidentiality of the proceedings.

Let’s Cover Some Basics

For starters, know that auction strategies are best used for mid-market businesses. The middle market represents a significant section or 40% GDP of the US economy and employs close to 25% of the workforce. Typically, revenue is the key differentiating factor when categorizing companies.

Although there is no universally accepted revenue benchmark, you can use these figures to get a rough estimate. Companies in the lower middle market earn approximately between $5M and $50M in annual revenues. The middle market category earns yearly revenues worth $50M and $500M.

The upper middle market is defined by revenues ranging from $500m to $1B. Companies earning over $1B in yearly revenues are typically large multinational corporations. Understanding this categorization is crucial since there are different buyer demographics for each market level.

Companies that demonstrate the potential to grow to a higher level can command higher premiums. For instance, investment bankers tend to specialize mainly in mid-market-sized companies. Small businesses earning an annual revenue of less than $20M typically don’t use auction strategies.

On the other hand, public companies often come up for an auction sale. Your M&A advisor will recommend the best approaches for selling your company. They will also walk you through the different steps to prep the company for a sale. Here’s a quick look at the three main types.

Auction Strategies – Broad Auction

During a broad auction, the company is made available to a broad range of buyers, targeting 100 or more entities. These auctions take the longest time to execute and may involve multiple rounds of bidding before closing.

Leveraging this strategy will get you the highest price for the company since competition is high and you’ll have multiple bids. But you also run the maximum risk of confidentiality breaches. Auction strategies like these are suitable for well-established brands that can generate buyer interest.

However, the entire auction process is time-consuming and involves added costs to cover prepping and marketing. Your advisors will vet each potential bid carefully before selecting the one that is appropriate for your needs.

Expect to put together an entire team of experienced professionals comprising an M&A advisor, and legal and financial consultants. You’ll also need to prepare the entire documentation in advance.

Upsides

• You’ll raise your chances of getting the highest price possible for the company thanks to the number of competing bids.
• The auction is open to all kinds of buyers and invites bids from hidden acquirers. Such buyers may not openly express interest in the company but leverage agents to purchase it.
• Board auctions are an accurate way to test the company’s viability and market valuation.

Downsides

• Maintaining confidentiality about the sale is challenging since information is open to all buyers to get maximum bids. Information about a potential sale can shake customer and stakeholder confidence. You risk losing business and credibility because of negative perceptions.
• You may have to invest a large amount of money and resources to prep the company and run the auction process. Screening multiple buyers and bids will also require time and money and navigating the bidding process is complex and confusing.
• Serious buyers may choose to stay away from the bidding wars and the complications that go with them.
• If the auction is not successful, it could hurt the company’s reputation. Attempting an exit in the future may result in lower returns.

Targeted Auction Strategies

Targeted auctions typically invite bids from a limited pool of acquirers of around 10 to 20 entities. Auction strategies like these have one-step and two-step variations. They are more beneficial since sellers can maintain confidentiality while ensuring higher valuations for the company.

Although this auction category is also a time-consuming process, it is also one of the commonly-used processes. Your M&A advisor will use tactical approaches to generate the optimum market tension to invite serious buyers.

At the same time, you’ll maintain a robust negotiating position amidst a pre-vetted group of acquirers. Targeted auctions successfully stimulate the market to attract buyer interest and attention.

Upsides

• Approaching only a limited number of pre-vetted buyers drives up market value.
• You can compare the different bids and acquisition structures which may include cash and non-cash components.
• Since only 10 or fewer buyers are invited to place bids, the sale process is more streamlined.
• You’re better positioned to negotiate for favorable terms and conditions and the auction can follow a controlled and structured timeline. Sellers can create the first draft of the Definitive Agreement.
• Revealing information and choosing buyers who can access the information is your prerogative.

Downsides:

• Approaching a limited pool of buyers also means missing hidden and serious contenders.
• Not all buyers may be interested in participating in a bidding war.

 

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Limited Auction Strategies or Negotiated Sales

This auction strategy involves approaching one to three interested buyers and allows you to maintain maximum confidentiality. Since you’ll approach only interested parties, the probability of the deal going through and closing successfully is high.

The entire auction sale process is typically less expensive, streamlines, and closes quickly. You can expect unsolicited offers from serious buyers and entities working through investment bankers. Usually, these buyers have already valued and pre-vetted your company before sending an offer.

Limited auction strategies are closed-door transactions which means that information about the sale remains confidential. Business continues as usual until the time the actual integration has to occur.

Upsides

• Limited auctions typically connect you with serious buyers looking to build a relationship. You can expect to achieve financial, cost, and operational synergies with full cooperation during integration. The chances of a successful M&A are much higher.
• You’re in a better position to negotiate for optimum pricing and get favorable acquisition terms and conditions. You get to draft the Definitive Agreement.
• Since these auction strategies involve a limited number of buyers, you have the option to decline the offers. If needed, you can restart the bidding process without losing the company’s reputation.
• You can structure the timeline according to your convenience and speed it up as needed.
• As the buyer, you can choose the amount of information you want to disclose and who to reveal it to.

Downsides

• Inviting bids from a limited number of buyers lowers the possibility of getting competitive offers. Chances are that you won’t get the optimum value for the company.
• Buyers usually know that you have only a few offers which gives you lesser negotiating power. Expect the potential buyer to conduct aggressive due diligence in an attempt to drive down the prices.

 

Whether you’re running an auction or raising funding, knowing how to value your company is crucial. Check out this video in which I have explained how to do that. You’ll find it helpful.

How Variations in Targeted Auction Strategies Work

One-step Variation

Since the one-step variation is essentially a targeted auction, your M&A advisor will likely approach only interested buyers. These entities could be private equity firms or acquirers operating within your industry looking for horizontal or vertical synergies. Here’s how the auction proceeds.

1. Your M&A advisor scouts the market for serious buyers and approaches them for their interest.
2. Buyers receive a confidential information memorandum and if necessary, a non-disclosure agreement to sign.
3. Potential acquirers usually review the documentation within a limited time interval.
4. Interested parties can place an offer by submitting a Letter of Intent. However, they are aware that multiple bidders have received offers. Your objective here is to get the maximum number of offers to compare and vet for the best valuation and pricing.
5. On receiving the offers, you’ll review them under the guidance of legal professionals and negotiate for higher prices. You’ll also discuss the terms and acquisition structure.
6. At this point, you’ll select a suitable acquirer and proceed to the due diligence phase.
7. Once the due diligence is complete, further negotiations can take place before drafting the final purchase and sale agreement.

 

In these types of auction strategies, M&A advisors inform buyers that this is a regular sales transaction. Letting them know that this is not an auction and the offer is available only to a limited group of selected buyers is crucial.

Although the company is a valuable purchase, it may not necessarily be a premier acquisition or have exceptional features. You may not be able to incite a bidding war or competing bids. The risk of buyers leaving the table rather than engaging in a competition to purchase the company is high.

During one-step auction strategies, your M&A advisor will attempt to close the deal within a definite timeline. However, since targeting strategic acquirers is challenging, they may take the time to make an offer.

Two-Step Variation

Two-step auction strategies are better suitable for premier acquisitions that have exceptional value. For instance, they may have highly-coveted IP or a top-notch team or product portfolio.

For this reason, when the company comes up for sale in the market, buyers are anxious to close to deal quickly. Two-step targeted auctions are more formal and proceed within a fixed timeframe.

Buyers are willing to follow the formal process in an attempt to execute the sale in these auction strategies. Here’s what happens:

1. Your M&A advisor scouts the market and puts together a pre-vetter list of potential acquirers.
2. Next, they organize an outreach strategy to contact buyers.
3. Buyers receive the criteria and timeline within which the deal will be executed.
4. Acquirers are aware that this is a premier acquisition and the number of interested parties will be higher.
5. Interested buyers must provide an “expression of interest” in writing that denotes their expected company valuation and acquisition structure. They can base their decision on the information offered in the confidential information memorandum.
6. After assessing the “expression of interest” documents and their terms, you’ll select the top contenders from the pool of buyers. These prospects then move to the second step.
7. At this point, buyers receive detailed information about the company and participate in management presentations.
8. Once acquirers have had the time to reconsider, they send in a formal offer and a purchase agreement. You’ll examine the terms, conditions, and pricing before choosing the best bid.

To Round Off!

Having made the decision to sell your company, engaging the services of professional M&A advisors is crucial. Serious buyers always prefer to negotiate with experts who know how the sale proceeds. Entrepreneurs may be good at what they do but executing a sale is a whole different ball game.

Managing the intricacies of auction strategies is best left to the experts. You’ll also raise the chances of a successful sale since the professionals know the market and how to conduct outreach. They are well-versed in identifying the right buyers and will connect you with them.

Having a well-known face at the table also adds credibility to your company and you’ll attract serious buyers. Competent representation has multiple advantages. You’ll leverage their connections to reach out to a wider selection of dedicated buyers. You’ll ultimately get the best deal suited for your goals.

Most importantly, you’ll ensure that the deal closes within a specific timeline and you walk away with money in the bank. And, with terms and conditions that ensure the transaction was a success.

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