Using an Auction to Sell a Business



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When you hear the word "auction", you probably think of an online auction website like eBay or a traditional auction house where people bid on rare collectible items. Both auctions are similar in nature because they involve a series of bidders who are competing to purchase a particular item. When a bidder places a bid, it must be higher than the previous bid or starting price. The objective is to outbid all the other bidders by getting them to stop bidding. They will eventually do this once they feel the current bid price is too high or too out of their budget.

As a business owner, you can offer your entire business for sale by auction. Many business owners do not even consider doing this because they assume that auctions are only for selling tangible items. They do not even realize that auctions can gain them a very high selling price for their business. It may even be higher than their minimum asking price. The best part is that the terms of the auction sale are usually more beneficial to the seller.

"Should I sell my business by auction?"

A business auction underway
Photo by MC Morgan

However, selling your business through an auction is a little different than a traditional auction. You cannot just put your business up for sale on eBay or through an auction house. Since the sale of a business is quite complex, it will involve many of the same formalities that are involved in a traditional business sale. This includes making the contacts, doing credit checks, due diligence, and so forth. You need to understand how an auction like this will work before you proceed to sell your business in this way.

How it Works

Using an auction to sell your business will not require an auctioneer. Most business owners will conduct what is called a "silent auction". This is the type of auction which does not have bidders competing in a public setting, whether it is an online auction or auction house. Instead, the bidders will meet privately in the boardroom of the organization or some other private setting.

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First, you would generally invite all qualified bidders to participate in the auction. You will provide them with standard information about your company’s management through an Information Memorandum. Based on this information, the bidders will make their non-binding bids. These bids are basically written offers which must include details about the structure and conditions of the deal. Most importantly, the bidders must specify how they will pay for the business if they win the auction. Bidders need to sign a Confidentiality Agreement too.

Meanwhile, you will not be allowed to do anything substantial with the financial aspect of your business. You cannot send out financial advertising materials, make unauthorized investments, or conduct unsolicited phone calls. After the bidders have sent their bids, you will narrow down the choices by choosing the best bidders which have the most acceptable terms.

In the second bidding phase, you will supply your bidders with all the due diligence information about your company that is necessary. Since they already signed the Confidentiality Agreement, they cannot disclose any of the information about your company that they receive from this point forward. Depending on the situation in your company, your lawyer may supply other commercial contracts and reports to your bidders. Some of these contracts might pertain to intellectual property rights and real estate property rights.

After all the contracts have been signed by the bidders, they will each submit their final bid to you. These are still non-binding bids which means that your winning bidder could back out before the sales contract is signed. That is why you need to carefully select your bidders beforehand so that you are choosing ones who actually have the means of following through with their bid.

Seller Advantages

Auctions for selling a business can either be made public or confidential. Sellers can have quite an advantage with a public auction because it brings more bidders to the table. After your auction is announced to all the potential buyers out there, it will encourage bigtime investors to want to place their bids. These investors will feel stimulated and anxious to outbid other bidders. Their impulsive feelings will keep pushing them to bid the highest amount that they can afford. This means good news for you as the seller.

If you own a public corporation with creditors and shareholders, the board of directors will want to see that you’ve obtained a selling price which exceeded their expectations. That way, they can reassure their creditors and shareholders that the value of the company still stands firmly. An auction may be the only way for you to achieve such a high selling price.

Since the seller is the one conducting the auction, they get to set the conditions and terms of the sale. The bidders who participate in the auction must agree to the terms beforehand. Investors tend to be more accepting of auction terms which favor the seller because they think that they will get a bargain purchase price for the business. In most cases, there is no bargain unless the business is already in bad shape.

Seller Disadvantages

It will cost more money for you to arrange an auction sale of your business. You need to hire an attorney to create sales contracts and auction paperwork. Since there are multiple potential buyers that will be participating in the auction, your attorney will be contacting all of them. The more time they spend helping you, the more money they will bill you for their services.

Not every business should be sold through an auction sale. Your business may have a complicated organizational structure or multiple owners who all need to give their consent for the auction. Maybe your competitor is already asking for a smaller amount for their business. These types of obstacles could make it difficult for you to successfully sell your business.

The managers in your organization are going to endure the most pressure from this sale. They will need to spend more time preparing for the sale while not telling their employees about what is going on. This can be difficult because managers will want to be quick to talk about it. But they will be required to stay silent until the actual sale has been made. Confidentiality is very difficult to maintain, though. There are so many stakeholders involved in the sale and it is easy for one person to slip and talk about it. Once that happens, the rumors will spread quickly throughout the organization.

If the truth does prematurely come out about the sale, it could cause important staff members of the organization to quit. They will assume that they’ll be out of a job soon, so they’ll want to look somewhere else. Some of your important customers or clients may quit too because they won’t feel comfortable doing business with leaders they don’t know.

Buyer’s Viewpoint

Sellers often benefit greatly from auctions. As for buyers, they despise auctions because they end up getting the worst end of the deal. All the bidders will be competing against each other and driving up the purchase price in the process. A buyer would much rather just make an offer to the seller privately and come to an agreement from there. This is not possible in an auction because everyone’s bid is considered.

The seller is the one who chooses the bidders. Some buyers that may want to bid will not even be given the opportunity to do so. The buyers who are selected will still need to compete against each other. This whole process can be very discouraging for a buyer. However, it also shows buyers that enough qualified investors are interested in purchasing the business. If you were just some desperate seller trying to get rid of your business, why would you turn away certain buyers while accepting others? A buyer will get the sense that your business truly does have value if you are going to be so careful in choosing the bidders. This could motivate a buyer to bid a little more for your business than they originally intended to.

The 5 Factors Which Drive an Auction

How do you get the highest selling price possible? Below are the 5 factors which drive an auction to its maximum limit.

Fear of Losing the Chance

Buyers do not like to lose at an auction. The reason they bid such high prices is that they want to win. In an auction like this one, they only get a few chances to bid. Buyers know that if they lose, then it could mean the end of a rare opportunity to obtain ownership of a valuable company.

Time Pressure

When you don’t use an auction to sell your company, there are no time limits set for the sale. This means there is no pressure to make a deal quickly. However, if you do use an auction, there is a time limit for when bids must be placed. Plus, the bidders feel pressure to place higher bids because they are competing against other bidders. In a fast effort to become the winning bidder, they may bid very high prices just to get your attention and strike a deal.

Competition

You don’t want an auction with only one bidder. This is an indicator that your business has no value and it will result in you getting the lowest possible price. Multiple buyers who are bidding to purchase the same business will drive the sales price higher. That is why you should invite as many qualified investors to bid on your company as you can.

Perceived Value

The value of your business is determined by your potential bidders. You can present them with information about your company’s assets and annual revenue, but this still won’t determine the value in their eyes. The perceived value of your company could be unique per bidder. Perhaps one bidder has an idea on how they can enhance your company and make it even better. So, they might be willing to bid a higher price just to have this opportunity.

The biggest factor that influences a company’s perceived value is the number of interested buyers there are for it. Like previously mentioned, bidders that see a lot of bidding competition will assume the value of the company is high. Otherwise, why would so many bidders want it?

External Validation

Bidders want some validation that your company is valuable enough to purchase. So, they will look for this validation from other interested buyers. Auctions create the perfect setting for bidders to get this kind of external validation from each other. It only motivates them further to stay involved in the sales process and bid a higher price.

Conclusion

If your business has more value than your competition, then you will get higher prices from your bidders. On the other hand, if your business has little to no value, then you likely won’t find any good bid prices coming your way. It is always a good idea to consult with a business attorney about whether you should sell your business through an auction or not. They will examine your organizational structure and determine what the best sales option is for you.



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