How to Succeed in an Auction
Business owners looking to maximize value in a sale often employ a competitive auction approach when taking their company to market. So, what can an interested potential buyer and its advisors do to stand out from the others and be selected by the seller?
The obvious answer is to offer to pay the most. Many times, although not always, the highest bidder is in fact the winning bidder. The buyer should work with its team of advisors to develop a thoughtful valuation approach. Submitting a competitive (even if it’s not the highest) initial bid indicates to the seller that the buyer is serious and has spent time and effort to carefully review the opportunity.
Aside from the dollars and cents, the following qualitative factors might also be important to a seller when determining with which party to move forward:
The structure of an offer can differentiate it from a competing bid at a comparable price. For example, a seller might prefer an offer of $25 million in cash at closing to an offer of potentially $28 million with only $18 million in cash at closing and the balance tied to an earn-out. When it comes to structure, in a seller’s eyes, cash is king.
Uncertainty is a transaction’s worst enemy. Proof of an ample credit facility capacity, a commitment letter from the financing source, or other similar documents are good assurances to a seller. If a seller is weary of a buyer’s ability to secure the necessary financing, they may elect to move forward with an alternative buyer option.
Prior to submitting a letter of intent, be certain you understand the seller’s transaction goals. These can include protecting the jobs of employees, plans to enhance the product or service offering to existing customers, continued ownership of the real estate as an investment asset, a limited transition period, etc. Submitting an offer that addresses these goals will help a buyer improve its position in the process.
Establishing a set of decision makers and devoting ample resources to thoroughly evaluating the seller, as well as meeting timing parameters of the auction process, all help to build rapport and confidence with the seller and their advisory team.
Buyers that are unreasonable with their expectations and/or unwilling to compromise on key deal provisions (such as the indemnification cap, escrow amounts and period, or baskets) could end up losing out to a more agreeable party. Starting a negotiation at a reasonable level shows the seller that you’re a party that is interested to complete the acquisition timely.
These are just a few ways a buyer can set itself apart from other bidders in an auction process. Every deal is different and will require flexibility and creativity to meet the objectives of the seller. Being aware of the approaches and considerations that can differentiate you as a buyer can increase your chance of successfully winning an auction without overpaying.