M&A auction tactics - preparation is the key

As M&A auctions grow in popularity among owners wanting to offload divisions or entire businesses, a new report outlines the importance of auction tactics for those who are looking to buy and sell.

More and more sellers opting for auctions

A growing number of private business sellers are clocking onto the fact that they can often secure the best price for their company by selling it through an auction process. Allen & Overy’s latest Global Trends in Private M&A survey found that 41 per cent of M&A deals around the world took place as auctions in 2017. In 2014 just 35 per cent were conducted through an auction and the percentage has been climbing ever since.

There are a number of reasons why this is the case and macro-economic factors have been playing a part. Private equity firms are awash with cash and eager to spend it on business acquisitions. At the same time there are relatively few assets for sale and, as a result, sellers are getting great prices when they sell through an auction. Additionally, borrowing remains cheap and plentiful, allowing buyers to fund their purchases at a low cost. Again, this is driving up prices attained through auctions, thus increasing their popularity among sellers.

Why sell through an auction?

As well as the macro-economic reasons detailed above, there are a number of advantages to selling your business in an auction.

Buyer Perception
The price of a business can be higher than simply what is reflected in its assets and performance. The perceived value of a business can be driven up through an auction process that allows the perceived value of a business to dictate the price paid, as opposed to the value on paper. The huge amounts paid for internet firms that are yet to even turn a profit illustrates this perfectly. An auction is often the perfect way to find out exactly what a business is worth in terms of its perceived value.

Time constraints and competition
Both of these factors can ramp up the pressure felt by potential buyers and result in higher prices being paid than those achievable in a traditional bilateral sale.

Vendor Control
In this form of sale, the seller produces the first draft of the sale and purchase agreement which can mean it gains from more favourable terms and conditions. The seller controls the auction process, creating the optimal competitive environment to maximise bargaining power.

Exposure
The vendor or its adviser/broker/investment bank will usually conduct a comprehensive survey of the market to uncover more potential buyers.

Validation
The knowledge that others are also bidding for the same business can validate a buyer’ interest in a particular asset, thus driving up the price they are willing to pay.

What are the disadvantages of an auction sale?

More adviser expenses for the seller in the early stage.
Legal, financial and other advisers will need to be instructed by the vendor in the early stages to help formulate the auction strategy and create the initial raft of documentation. Legal fees in particular may well be higher. Given that the seller may end up negotiating with several potential purchasers concurrently, the adviser fees will also be higher at that stage.

Risk of information dissemination
The wider dissemination of information, some of it confidential, to a wider audience can pose a risk to the seller. This is particularly so if one of the bidders is a competitor whose main objective is to gather intelligence.

Strain on management
It is not easy to negotiate with more than one party simultaneously. The seller should prepare to have its management resources diverted to an extent from the daily running of the business. Staff morale may suffer in a publicised sale, and again afterwards if the process fails for any reason.

M&A auction steps

Allen & Overy’s recently published ‘New Tactics for New Times’ report talks about the rise in popularity of M&A auctions and underlines how important it is for both sellers and buyers to be fully aware of the steps necessary to achieve a successful result.

“M&A auctions are like a game of three-dimensional chess, with multiple players. Deft tactics and psychological game playing go with the territory. Preparation will help both sellers and buyers avoid common pitfalls and the penalties that come with them.”

The report outlines the steps the sellers need to take in order to achieve auction success. Put very simply, these are:

- Prepare fully, well in advance of the beginning of the auction process, with advisers.
- Issue a teaser, create documentation.
- Accumulate a long list of potential buyers.
- Offer these buyers access to a confidential information memorandum.
- Receive feedback and determine final shortlist of buyers. There may be non-binding offers to evaluate at this stage.
- Provide further information to buyers, including pre-prepared due diligence.
- Those still interested in bidding may request more information to satisfy their due diligence requirements.
- Buyers submit offers.
- Undertake final negotiations.


What should the information memorandum include:

In summary it should contain sufficient information about the business to elicit meaningful bids from potential purchasers, including:

- A full description of the business, and its history.
- A summary of the industry.
- Main assets of the business.
- Historical financial information.
- Future projections.
- Management and staff information.
- Information on key customers and contracts, although the detail of this depends upon the sensitivity of the sale.


Buyers have their own steps to take to ensure they don’t lose out on the business they have their sights set on:

- Be prepared to move quickly as soon as a teaser is issued.
- Prepare by becoming as informed as possible on the target before the auction process begins.
- Establish the auction strategy they will use.
- Be ready for a shorter two-round only auction process.
- Make sure that financing is in place.


Key Tactics

In addition to the steps to be taken by both sellers and buyer, there are tactics to focus on to achieve a successful auction, according to Allen & Overy:

Control

It is recommended that sellers ‘set the rules of the game from the start’ and then try to keep a tight grip on proceedings throughout.

Opening Shot

This one’s for the buyers. Putting in a low opening bid can be tempting as a means to keeping the final price low. However, an opening bid that is too low will risk the sellers completely writing the buyer off as a serious contender in the auction. It’s a delicate balance.

Mistaken Buyer Advantage

Buyers looking to gain an advantage risk ‘overreaching themselves’ by being ‘over pushy’.

Movement

The report recommends that both sellers and buyers remain nimble so that they can respond quickly to changes in circumstances in order to ensure the auction goes well.

Competitive tension

There is an advantage for buyers in creating and maintaining competitive tension in order to maximise the price eventually paid for their business. Allen & Overy add: “...for bidders there can be an advantage in being seen to support the seller in creating that tension. It could move the bidder up the pecking order and help it emerge victorious.”

Conclusion

Thorough preparation on both sides of a business auction process will help buyers and sellers move quickly when they need to. Preparation will also help them to create certainty in the process. Buyers will be able to enter the process with a bid at an appropriate level, which will prevent them from jeopardising their position in the negotiations. Lastly, sellers usually want a simple process and buyers should bear this in mind at both the bidding and deal-making stages.

Share this article

Latest Businesses for Sale

View more businesses for sale