When you decide to sell your business, you’ll get a lot of well-meaning advice – some of it from your most trusted advisors – that sounds like it makes a lot of sense. One such tip is that the best way to get the highest price is by having a merger and acquisition (M&A) professional run a business auction process to sell your business.
On the surface, this sounds logical. We’re all familiar with how an auction works: Something of value is offered for sale with no price attached. A competitive bidding process is set up for potential buyers – who ideally bid the price up – with one buyer being declared the winner. In an M&A scenario, this is the buyer who offers the most favorable price and terms.
Yet a formal business auction process is rarely used to sell small businesses in the lower middle market (annual sales <$20M).
In this article, we’ll look at the basics of how a formal business auction process works. We’ll also discuss the pros and cons of using a business auction, and when they are a good option for sellers. Lastly, we’ll describe three elements from a larger business auction process that business brokers use to successfully sell a small business.
Business Auction Basics
Pure business auctions come in a few different varieties. They are typically used for the sale of middle market, upper middle market, and public companies. A formal auction process requires months of advanced preparation by a team of highly-specialized advisors. As a result, a formal auction process is the most expensive method for selling a business – although it may also yield the highest price.
There are three main categories of business auctions:
- Broad Auction: Targets 100 or more buyers. Involves more than one round of bidding.
- Targeted Auction: Targets a smaller pool of buyers, perhaps 10 to 20.
- Negotiated Sale: Involves reaching out to 1-3 clear buyers. Also called a Limited Auction.
A basic timeline might look like this:
- Advance preparation of all documents
- Create buyer list and outreach strategy
- Buyer outreach and receipt of initial bids
- Management presentations and buyer meetings
- Second round of bidding (for Broad Auctions)
- Negotiation of multiple offers
- Sign Letter of Intent (LOI) with one buyer
- Enter into exclusive due diligence period
- Sign Definitive Agreement and close
Pros & Cons of Using a Business Auction Process
There are advantages and disadvantages to selling a business using a formal business auction process. An experienced intermediary (business broker, M&A advisor, or investment banker) will have a good idea of what type of process is appropriate for you, your business, your industry, and your goals for a sale.
Pros of Selling With a Business Auction Process
- Sellers have control over the timetable and can expedite the process as desired.
- Sellers have control over how and when to disseminate information.
- Seller creates the first draft of the Definitive Agreement, setting deal structure.
- It can result in maximizing the final purchase price.
Cons of Selling With a Business Auction Process
- Auctions require extensive preparation by a sophisticated deal team and come with a hefty price tag. Sellers must hire an experienced M&A advisor or investment banker, as well as legal and financial advisors to set strategy and prepare all documentation in advance.
- Price and terms take priority over who actually buys the business.
- Not all buyers will agree to participate in a business auction process. In their view, the winner may actually be the loser, as the winner may be the one who overpaid.
- You and your deal team are negotiating simultaneously with multiple bidders. Managing the process can be difficult, nuanced, and complex. (Did we mention expensive?)
- Depending on the number of buyers, it can become difficult to maintain confidentiality.
The question of whether or not a business auction process is right for selling your business may not be quite the right question to ask. Unless you conduct talks with only one buyer, the question is what type of auction process makes the most sense given your business, as well as both the number and types of buyers who may be interested in acquiring it.
The Best Business Brokers Modify the Auction Process for Small Business Clients
The best small business brokers will take the essence – and many of the actual steps – of the auction process used by investment bankers, and adapt them to successfully sell a small business. Keep in mind that it’s common for business brokers to price a business for sale, which eliminates the auction-like bidding exercise amongst buyers.
Here are three things business brokers do that mimic a larger auction process:
#1: Run a structured, disciplined business sale process
No good buyer will work with a seller who is running an auction process on their own. Likewise, there are many sophisticated buyers in the lower middle market who will pass on any for-sale-by-owner opportunities. Why? Because owners are typically good at running their business but have no idea how the selling process works. The result for a buyer is a lot of time (and money) wasted on an effort that had little chance of success.
Hiring an experienced business brokerage firm will greatly increase the odds of successfully selling your business. The best business brokers have developed a proven process that works for their clients. Hiring a business broker also lends credibility to the entire sale process, attracting high-quality buyers who will only pursue businesses for sale that have competent representation.
#2: Generate interest from multiple buyers
There’s an old adage in the M&A world: One buyer is no buyers.
Ultimately, of course, it all comes down to one buyer. But it’s best to find that buyer by creating competitive tension and urgency around the business being offered for sale. Taking the business to market achieves this.
Some owners think that the best strategy for selling is to quietly put the word out to a few people in their network. In our experience, this puts you at a disadvantage as a seller: The serious buyers will come to you.
In short, put the business up for sale. Good business brokers have the knowledge and the resources to cast a wide net for prospective buyers while keeping the business sale confidential.
Talking to multiple buyers (ideally at least three) gives you different perspectives on your business, allowing you to choose the buyer – and deal – that is the best fit for your goals.
#3. Maintain Deal Momentum
One of the benefits of a formal business auction process is that it comes with strict deadlines and milestones attached, and there is no deviating from the schedule. You’re either in the process as a buyer, or you’re out. There is no wiggle room.
The worst case scenario is to let the sale of your business drag on for months, only to end up back at square one with nothing to show for your efforts.
You don’t need to run a formal auction process to create a sense of urgency in buyers. The best business brokers will communicate a desired timeline in the Confidential Information Memorandum (CIM), and ensure that buyers stick to it. Your business broker will keep everyone moving forward through each stage of getting a deal done, from the day you hit the market to the closing date.
Hiring a business broker to take your business to market also lets buyers know that you’re serious about getting the business sold now. They’ve got one shot at the opportunity to buy your business, and this is it.
Business Auctions: Myth vs. Reality
The notion of a competitive bidding process can conjure up visions of frenzied buyers, heated negotiations, and steely-eyed brinkmanship. But the reality is less dramatic. Most businesses in search of an outside buyer are taken to market by an intermediary and sold through some form of structured auction process.
It’s important to remember that what works on Wall Street doesn’t translate to Main Street. Although many lower middle market businesses have great success with a modified auction process that the best business brokerage firms can run. Any successful sale – regardless of format – is still a rare achievement for the vast majority of small business owners.
The advisors at Allan Taylor & Company have been through the selling process with dozens of owners since 2006. We have the experience to conduct a real-world business valuation, help you prepare your business for sale, find buyers and get your business sold. Reach out today.