The Business Sale Process: Private Auction vs. Negotiated Sale

When selling your business, there are several different methods to choose from; a broad auction, a private auction and a negotiated sale. In most cases, the owner of a privately held company wants the highest degree of confidentiality. They want to minimize disruption to customer, supplier and employee relationships. Owners also want to mitigate the risk of competitors discovering their intent to sell and using it as a tool to try and gain market share from them.


For those reasons, we are not going to discuss the public auction process, which is most often used for publicly held companies and is the least confidential. Instead, we will focus on the two methods for selling your business that provide a higher degree of confidentiality and that occur most frequently in the middle market. 


Private Auction (Controlled Auction)


First, we need to dispel the myth that a private auction works in the same way that you would see at an auto auction. To start with, there is no auction room. The term private auction simply describes the process through which you encourage competing buyers to pay a higher price and better terms for your business.
Controlled auctions may include on average five to fifteen interested buyers, which we’ll refer to as “buyer prospects.” After extensive planning and analysis, your M&A advisor will prepare a confidential memorandum, which describes the company’s stock or assets to be sold, as well as the business opportunity for the acquirer. Other information in the memorandum may include the history of your company, products and services, explanation of processes, business model, customers, industry reviews, geographic coverage, strategy for growth, ownership, legal structure, facilities, people, competitors, competitive advantage, assets and capital expenditures.


Next, potential buyers need to be identified and contacted. Your advisor will go through all their existing contacts and relationships, as well as conduct a fresh search of all likely buyer candidates. After receiving an executed nondisclosure agreement from interested prospects, your advisor will request your approval to send them the memorandum, which includes a timetable for the auction process.


After follow-up conference calls and additional information requests, your advisor will request a preliminary indication of interest from each prospect. You will then choose the most qualified and most likely buyer prospects who will be granted access to additional information in a secure data room and possibly a conference call or meeting with you.


At this point, buyer prospects are requested to submit an indication of interest with a range of offer prices based on different variables. The concept is to keep moving forward and reducing the number of prospects until you are left with the most serious buyers who are most willing and able to pay the highest price at the most favorable terms.


The next step is to rank the buyer prospects into a list of buyer candidates in order of priority.


With your consent, the advisor will then request submission of a LOI (Letter of Intent) from the lead buyer, which is a non-binding commitment to purchase the company.


A more detailed description of the sale process can be found on ClearRidge’s website:
http://www.clearridgecapital.com/saleprocess.htm


Advantages of a private auction


A private auction is typically appropriate when you are able to identify multiple potential buyers. The process is designed to increase competition between potential buyers, thereby increasing your negotiation power and maximizing the bidder’s price and improving their offer terms. As the seller, you have better negotiating strength and a better chance of closing the deal with one of your preferred buyers.


Disadvantages of a private auction


A private auction is typically a more complicated and costly process than a negotiated sale. Even though all dissemination is private and to a pre-screened group, it does make the sale more widely known and increases the potential risk of other people finding out. Additionally, certain companies might not want to participate in an auction process. This could be because it’s unfamiliar, or maybe because it is more complicated and with a pressured timeline. 


Importantly, it should be known that in both the private auction process and a negotiated sale, there is no “listing” of the business for sale, nor is there any kind of public announcement. It is a targeted, confidential and specific outreach to possible buyers.


Negotiated Sale


In contrast to a private auction, a negotiated sale involves only one to maybe a handful of interested parties. In situations where you have a clearly identified potential buyer and want a speedy and confidential process, a negotiated sale will likely be more appropriate than a private auction process. A strategic buyer typically expects to benefit from synergies between the companies and therefore may be willing to pay a fair price without the added pressure of a private auction.


In contrast to a private auction process, garnering a high price in a negotiated sale may not be an easy task as the lack of multiple alternative buyers diminishes your negotiating power. 


A negotiated sale tends to be less disruptive to the continuing operation of your business, as you are not so tied to the particular deadlines and time requirements of a private auction. However, extensive due diligence is common in a negotiated sale, which can divert management’s attention away from daily operations. One possible solution, which is often overlooked, is to conduct the majority of the due diligence assignments in 
advance of the sale process in your own time at your own pace, so that any information to be requested by the buyer is already available and just needs refreshing and updating as the sale process moves along.


Conclusion


It is important to note, however, that these two types of sale process do not have to be entirely distinct from one another. For example, it may make sense in a business sale to take the early steps of the auction process, including narrowing down a full spectrum of potential buyers, then pre-screening them for industry, products, services, capabilities, size and profitability. Then take the most qualified buyers from this list and discreetly determine the value range they would offer for a company with the same profile as your company. You could use these buyer prospects to validate the best offer from your preferred buyer.


Whichever process you choose, it should take less time and run more smoothly overall if you do most of the work up front. Buyers prefer, and will often pay a higher price for a company whose sale process is organized, efficient and time-effective. It is a good reflection of the efficiency of operations and overall management of the business. 


In choosing the right process for your unique business and situation, it is a good idea to discuss your thoughts with an advisor and consider the market environment in which you are trying to sell, your objectives, concerns and also the likely number and type of potential buyers. An experienced M&A advisor will also help to manage the process and ensure that you are able to realize your goals from the sale.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2010. About ClearRidge Capital ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms. ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada. Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values. For further information, visit www.clearridgecapital.com.