There are three types of sale processes: broad auctions, targeted auctions, and negotiated sales. The most appropriate process for the sale of a business is determined by market dynamics, the seller’s objectives, and the number and type of potential buyers. The seller and its investment banker will generally select the sale process that maximizes the sale price, but other factors like certainty of execution, deal financing, and regulatory (e.g. anti-trust) issues may ultimately determine the best buyer. We discuss the three types of sale processes below.
1. Broad Auction
A broad auction employs a competitive bidding process which is likely to achieve the highest value for the seller(s) of a business. The ideal candidate for a broad auction is a standalone business that will attract many buyers. As such, synergies are not likely to be a factor for the buyer. The universe of potential buyers typically numbers in excess of ten bidders, and could include financial sponsors or strategic buyers seeking to expand their existing markets or enter new ones. Additionally, this process is most effective in a strong merger market.
There are, however, some drawbacks to the broad auction. First, a broad auction may deter potential bidders because some buyers refuse to participate in auctions to avoid overpaying for a business. Second, the sale process is more likely to become publicly known, which could be disruptive to the target’s operations. Finally, a broad auction consumes a substantial amount of management’s time and attention, and must be carefully orchestrated given the large number of parties involved.
2. Targeted Auction
A targeted auction typically includes between three and ten buyers, and thus affords the seller more control over a process with fewer participants while preserving the benefits of a competitive bidding environment. This process is most effective when there is a clearly identifiable universe of likely bidders. It provides more flexibility in terms of timing, since there are fewer bidders with whom to coordinate.
One notable disadvantage of the targeted auction is that it may be more difficult to maximize value to the seller if the bidders are able to make inferences about other parties likely to be involved in the process. Thus, bidders might be able to assess one another’s likely valuation (based on the ability to realize synergies, finance the deal, etc.) and determination to win the auction. Furthermore, the target list may omit some potential acquirers who could have bid aggressively.
3. Negotiated Sale
A negotiated sale involves just one or two buyers and is most appropriate when there is a clear buyer (or at most two), and speed of execution and confidentiality are of paramount importance. Typically, the buyer is a strategic acquirer that expects to realize substantial synergies in the combined business, which suggests that the buyer should be able to offer a high price. However, extracting a high price may be difficult if the seller does not have a viable and obvious alternative.
The negotiated process is conducive to highly engineered transactions involving financial, tax, and other structural complexities. As a result, the time to consummation of a deal in a negotiated process can sometimes exceed that in an auction process. When the transaction is complex, the due diligence process may be especially exhaustive and thorough, which can be a significant diversion of management’s attention from the operation of the target’s business. Furthermore, the seller may have limited ability to compel action on the part of the buyer, unless there is another suitor (or other alternative) standing by.
From an operational perspective, the negotiated sale process can be less disruptive to the target’s business and employees, because the process affords greater confidentiality and less disclosure to third parties, such as suppliers and customers. Also, avoiding the public’s eye maximizes future alternatives if the sale is unsuccessful, and the market may not recognize a break-down in negotiations as a failed sale.
Auction Process Overview
The auction process typically takes four to five months to reach a signed agreement between the buyer and seller. Actual closing of the deal after the signed agreement is in place can take another few weeks (for private companies) to over a year (for deals with significant regulatory hurdles). The following stages and timing relate to a typical two-stage auction process, either broad or targeted. A negotiated sale may omit or compress some of these steps, depending on the circumstances.
Stage 1 – Solicitation / First-Round Bids
- The investment banker sends a summary (typically 1-5 pages in length), otherwise known as a “teaser” to potential bidders, along with a confidentiality agreement.
- Upon execution (i.e. signing) of the confidentiality agreement, the bidders receive a more detailed (perhaps 50+ pages) confidential information memorandum (IM) or offering memorandum (OM).
- Based on the IM, bidders make a preliminary bid.
- The investment banker and seller review the bids, and selected bidders are invited to participate in further due diligence.
Stage 2 – Due Diligence / Second-Round Bids
- Following due diligence by the selected bidders (which may include management presentations, data room access, and site visits), final proposals are due.
- Finalist(s) are then selected for negotiations.
- Negotiations culminate in the execution of a definitive acquisition agreement.
- After receiving regulatory approvals and all terms and conditions have been met, the deal is closed.