NL9 

Step 7, Auction 

In Step 6 we learned about how to contact the likely and unlikely buyer candidates.

When buyer candidates show interest, the ideal situation from the seller's standpoint is to get an auction going with active bidding for the company. The ideal buyer characteristics for an auction are to have two or more synergistic (strategic) buyers bidding against one another. Financial buyers do occasionally participate in auction situations, but their bids are small increments of the original bid with manipulations of the terms to make the deal more attractive to the seller. Unlike the synergistic buyer, they have little room to play. 

Synergistic buyers, depending on the synergy of the situation, can make substantial improvements in their bids. In a strategic merger where there are substantial cost savings and/or significant improvements in the competitive situation (read possible improvements in pricing because of less competition), the strategic bidder may bid significantly higher than the financial buyer. I say, "may" because they won't bid higher than the financial buyer unless forced to do so in an auction situation. This is the main reason for the saying in the industry, "If you have only one bidder, you don't have a bidder, the bidder has you." You really don't know if you have received the best price. 

The best time to conduct the auction is at the end of the marketing phase before the Letter of Intent is signed. 

Some marketing campaigns have bid due dates with a specific bidding format. My preference is to have no target date or specific terms, but to manage the process such that the initial bids can be directed to all arrive in the same general time frame. I don't like to restrict the flexibility of the buyer candidate. I feel that we get better initial bids by not creating the auction atmosphere up front. Some companies won't bid at all if they know an auction is likely to happen. I like to get the initial bids in hand and then work out a strategy to enhance them. (Bids usually come in the form of a Letter of Intent). 

The auction is a place where your intermediary is indispensable. It is almost impossible for you to conduct your own auction. Cajoling bids and not disclosing the other bid information puts one in a bad light with the bidders. Let the intermediary be the bad guy. Not every marketing campaign ends with multiple bids. Without multiple bids, each point of the deal has to be negotiated on its merits. Again this where to use the "power of limited authority" your intermediary brings to the table. 

Once you select the successful bidder, now you are ready to sign the Letter of Intent. Next month we'll talk about the Letter of Intent, its purpose, its form, its terms and what should be covered in it. 

Tip of the Month 

Selling a business is an activity most entrepreneurs do only once or twice in a lifetime, and it usually is the largest personal dollar value transaction of a lifetime. Trying to do it yourself can be a very costly on-the-job training experience. Engage an experienced intermediary to help you.