Auction processes can be used as a mechanism to sell a business rather than other more conventional negotiation procedures. The auction is designed to elicit competitive bidding from potential buyers and short circuit long negotiation periods being incurred.
Auctions can be run with lots of bidders, or they can be targeted with a select few bidders who have expressed a particular interest and appear to be serious contenders for proceedings with a purchase if the terms can be agreed.
This process comes with its advantage and disadvantages.
The advantages of an auction process for the seller are:
- the seller can secure the highest possible price where there are a number of competing bidders.
- the seller can control the conditions of the sale: for example, in preparing the initial drafts of the transaction documents and in considering mark-ups of the bidders, the seller will usually adopt and insist on a lighter, seller-friendly approach to warranties and indemnities in the share purchase agreement.
- if one bidder falls away, there will be another bidder or further bidders to step into their place.
The disadvantages of an auction process for the seller are:
- an auction process will require a large amount of preparatory work.
- an auction process is likely to expose the target to tactical investigation by its competitors.
- if one bidder falls away (for whatever reason) or if the auction process fails, other potential bidders may question why the deal fell through and that failure may damage any future plans of the seller to dispose of the target.
The advantages of an auction process for the bidder are:
- an auction process may give the bidder access to transactions that it might otherwise not have had access to.
- the bidder may be able to conclude an acquisition by auction more quickly than a private acquisition, as the seller will have undertaken the necessary pre-sale preparations.
- even if the bidder is not fully committed to the auction and does not progress beyond the initial stages, there may be commercial advantages from being involved.
The disadvantages of an auction process for the bidder are:
- as the seller can maximise the price, an auction sale may result in the bidder paying a premium.
- the bidder will have limited ability to be chosen as the preferred bidder if there are a number of competing bidders (unless it is prepared to pay a premium on the price) and it will also have limited ability to control the transaction process and to negotiate specific deal breakers.
- the bidder will need to show the seller that it has appropriate funding in place if it is to be considered to be a serious contender and to show certainty that it can complete the transaction.
An auction process generally involves the following stages:
- selection of the seller’s professional advisers
- preparation of an information memorandum, management presentation materials and draft transaction documents
- the seller approaches potential bidders
- the signing of confidentiality agreements
- an initial round of indicative offers
- a second round of final offers
- the selection of preferred bidders
- exclusivity and final due diligence stage
- negotiation of final terms
If a company is considering selling in this manner, it is important that they obtained the correct advice and an early stage as the preparation work is extensive and can require input from various advisors.
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