Selling Your Business? Why Do You Want a Limited Auction?
What is a “limited auction”?
The idea of a limited auction is that there are multiple parties bidding on the acquisition target – in this case, your business.
Why would I want a limited auction?
Having multiple buyers will assure that you ultimately receive the highest price for the business. If it is done right, you will continue negotiating until there is only one bidder left – the bidder who is willing to make the highest offer.
How is a “limited” auction different from a “broad” auction?
In a broad auction you are typically offering the company for sale on a public basis. That means you are not concerned with confidentiality and are seeking to reach the highest possible number of buyers. This type of auction can only be successful when you are sure it will not create difficulties with your customers and employees if the fact that the company is being sold becomes public knowledge. This is usually the case with larger businesses, particularly publicly held companies where public disclosure is required anyway. A limited auction, in contrast, maintains a higher level of confidentiality than a broad auction. This type of auction is more appropriate for middle market companies. Most limited auctions have a small number of bidders that are identified by the investment banker and approached in a confidential manner.
What is the biggest mistake when running a limited auction?
I think it is important to create a relationship between the seller and the buyer in any transaction. When you disclose to buyers early in the process that there are multiple other buyers submitting bids, it can damage this relationship. The result may be that some buyers elect to pass on the opportunity altogether. Or, some may end up not taking the auction very seriously. This may ultimately play out as a lower selling price for your business.
Instead, I generally only disclose to a buyer the presence of competitive bidders at the last round of discussions – and then only if I can get something tangible in return for making the disclosure. For example, if I need another $250K to make the deal, I may tell the buyer that yes, there are other bidders, but that if they will increase their offer by $250K, my client is ready to sign the letter of intent. In a case like this, I use the tactic in order to obtain something tangible, and I use it only at the end of the negotiation, not at the beginning. In most cases, this does not sour the relationship that has been built over time between the buyer and the seller.
Limited auctions, if properly carried out, can be very advantageous for sellers of midsized companies. For more information on how to plan your exit and sell your business, visit Exit Plan Pros.
