What is a Controlled Auction Process? In a controlled auction process our objective is to create a competitive market among multiple buyers for the sale of a business.
There are three primary purposes of a controlled auction process:
- To test the market to find the highest sales price;
- To create a competitive bidding process;
- To create multiple options for the seller to evaluate.
There are a couple of different strategies for conducting a controlled auction process. One is to assemble a list of potential buyers and to send out communications to those buyers all at once with a date that they must submit bids. There are advantages to this variation. It can add speed to the process since everyone is coming to the table at once. It also letâ€™s buyers know that there is a competitive bidding process. Some buyers will like this approach because they are concerned that their bid will be â€œshoppedâ€ if there is not a stake in the ground on when bidding will cease. There are disadvantages as well. You have no chance to adjust your process as you go. Generally speaking you will learn from early interested buyers some strengths and weaknesses to your business or presentation that you can adjust. The other disadvantage is that you must be prepared for a heavy workload in a short period of time. This can take away from your ability to operate the business effectively. We generally do not recommend this approach although we have executed it successfully.
The second is a modified approach in which a buyer list is attacked over time. The advantages and disadvantages should be obvious. You have the opportunity to adjust your approach over time as you learn what buyers are thinking. You also have more time to evaluate and qualify potential buyers. There may be other buyers or industries that surface that you have not considered in your initial marketing process. You have no deadline so you have the ability to adjust and continue to look for the right buyer. This can be a disadvantage to this approach as buyers sometimes are unwilling to enter this process when they donâ€™t know how long you may continue to look.
Most professional processes run on a variation of the controlled auction. Drawbacks to any auction process are that:
- Information about your business may be in many hands so it is critical that you have a professional handling the transaction who knows how to maintain confidentiality;
- You must carefully vet your target list to avoid competitors and to find those that would have the best reasons to buy;
Role of Ownership Transition Planning
Most businesses do not complete a pre-sale preparation process. Most business brokers and investment bankers take businesses as they are and try to market them. This makes the sale more difficult and opens more issues that buyers can find to drive price down. Most reputable business brokers and investment bankers like businesses that have completed and ownership transition plan because the business is easier to sell and there are fewer surprises.
One Buyer Is No Buyer
Many times we encounter sellers who have been approached by an unsolicited buyer. Many tell me that they get multiple letters each week from entities claiming to have multiple buyers interested in their business. These generally are not legitimate and are pitches to try to get listings. However, on occasion a business will be solicited directly by a competitor or a private equity group that appear and may have legitimate interest.
These are very dangerous situations for sellers.
- Do you know whether that buyer is qualified to purchase your business from a financial, cultural, and competitive standpoint?
- If the buyer is the only buyer, he may learn a lot about your business and then simply disappear with your information. Buyers may or may not adhere to a Confidentiality Agreement, if one was even executed. There is nothing in a single buyer process to keep a buyer on good behavior;
- Often-times sellers will be too trusting and will reveal far too much information. I have seen sellers hand over tax returns, customer lists, suppliers, employee lists, etc with only a simple confidentiality agreement in place. You can probably guess what happened â€“ and it was not good;
- Sellers will become distracted by the sales process. The buyer will continue to ask for reams of information and once this starts the seller will feel compelled to comply;
- This distraction will prevent the seller from operating the business as they normally would;
- If the seller may be considering working for the buyer this can be a particularly difficult situation since the seller wants to create and preserve a good relationship. There is no one to control the process;
- If there is no competition, the buyer has extreme leverage in whittling away at the price. Often-times a buyer will submit a price that looks very attractive and then use the due diligence process to find “problems” that they use to discount the original offer. If the seller is emotionally invested in the process the natural inclination is to give concessions to get the deal done. The buyer will then continue to demand additional concessions once this weakness is exposed;
- Buyers are sophisticated and will have teams of advisors. They have often done many transactions while this may be the only transaction the seller will ever participate in.
It is therefore critical that the seller engage an advisor team that may include a Certified Exit Planning Advisor, Transaction Specialist (business broker or investment banker), CPA and legal counsel.
Next week we’ll talk about what you should do if you have already been approached by a buyer.