I have heard all kind of reasons over the years for not conducting an auction process for the sale of a company.
- I am afraid my employees will find out.
- I am afraid my competition will find out.
- I don’t want a lot of people walking through and disrupting my business.
Create an Auction Process
One of the many roles of the investment banker is to create an auction process. With competition your situation usually gets better. Creating competition keeps everyone a little more honest in the process. A lone buyer feels no competition. When a buyer knows others want the same company they tend to become more aggressive. When you have multiple potential buyers, all of whom want the same company, the buyers feel the competition. Buyers don’t lead with their lowest price because they know the competition wants to win just as much as they do. The seller typically through an auction has other offers to consider. The price usually goes up! Auctions provide built-in competition for the value of your company.
Each buying group will see the company a little different from the other. What is important to one buyer is not necessarily important to the other. Those differences in perspective can create tremendous value. A fundamental in our office is try to find the buyer whose acquisition solves a problem. Look for the situation where 1+1= 3. Make that argument effectively and watch value be created and resistance reduced.
Create a Sense of Urgency
Auctions by their nature define time lines. Without a deadline there is no pressure for a buyer to be in a hurry. No pressure to pay more or negotiate a more favorable term for the seller. No incentive to end the due diligence process or accept a less beneficial legal language because the buyer has nothing to compete with.
There is a reason sellers of companies are being approached directly to bypass the auction process. Buyers know that a competitive transaction raises the cost to them and the terms can become less favorable. Once you sign a letter of intent your bargaining position declines and the buyers goes up. Knowing other buyers are standing in line keeps everyone a little more responsible and a little less likely to stand on the outer limits of something acceptable.
One of my favorite expressions in the industry of Mergers and Acquisitions is “Buyers buy with the heart and justify with the mind.” Competition isn’t just good for raising the price or keeping people on track. Others wanting your company justifies the buyers interest.
This not to say that a direct approach should be ignored or discounted. Just understand that bringing an investment banker into the process says you are getting professional guidance through the deal.
Recently I was approached by a seller who knew who the perfect buyer was and wanted us to negotiate a deal with them for their company. They indeed made a good offer, what I thought was market at the time, but the negotiations broke down over working capital. They wanted the excess capital that had been built up in the company. Private businesses often use their companies as a place to hold their excess cash. To a buyer it looks like you need the capital to support the ups and downs of the industry. I made the argument to the buying group their proposal was out of market and suggested to the sellers we look at providing some competition and we approached their second choice. Their second choice offered a very similar proposal, but they were willing to pay market on the working capital. It improved the net proceeds of the transaction by over a million dollars. This was indeed a situation where competition created value.
Create the Opportunity for a Premium
In closing, create an opportunity for a premium buy engaging an investment banker or M&A advisor. Their auction process will create competition, create a sense of urgency and define a fixed timeline. All things being equal The purpose of an auction is to raise the value of your company and make negotiations with everyone a little easier.
Sponsored in part by:
George Walden is a Managing Director and Principal in Corporate Finance Associates’ Houston office with twenty-five years experience as a middle-market investment banker. George is a member of CFA’s equipment industry practice group and an expert in the precision machining industry with special emphasis on manual machining, CNC precision machining, and gun drilling services and has been responsible for several industry-leading transactions. You can learn more about George HERE.