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M&A Attorney Comments on Business Sales by Auction

There are a few strategies an M&A attorney / business law attorney can implement when assisting with the sale of a business, and one of those includes an auction. An auction in the context of selling a business, is different than the common meaning of auction. An auction with respect to the sale of a company or business involves the seller seeking competing bids. Although an auction has all of the same components as a single buyer transaction, there are additional steps and considerations because the seller is dealing with multiple bidders.

This article highlights some of the pros and cons of the auction process from the seller’s perspective. The pros and cons include the following:

Pros:

• The seller can generally reach more potential buyers through an auction.
• Because the process is competitive it often maximizes the sales price by encouraging potential buyers to bid against each other.
• The seller can gain leverage by keeping confidential the number and identity of the bidders. This happens when the bidders think the auction is more competitive than it actually is.
• The seller can generally negotiate more favorable deal terms when there are competing bids.
• The seller controls the sale process and the seller’s M&A attorney drafts the transaction documents. Drafting the transaction documents can help minimize modifications buyers make to the transaction documents when they know the process is competitive.
• The seller controls the due diligence process, including the number and scope of the documents disclosed and amount of time bidders have to investigate the target company.

Cons:

• An auction is not suitable for all businesses. This is the case especially where the number of potential bidders is limited.
• If a potential buyer has already approached the seller with an offer for the target company, starting an auction process may drive that party to withdraw its offer.
• Management may become distracted from their daily activities of running the business when they participate in and auction with multiple parties.
• It is often more difficult to prevent employees from learning the company is for sale if senior management is engaged in a complex auction process.
• The cost to seller is usually higher than in a single buyer sale. The seller typically engages an investment bank and may incur higher legal fees because its lawyers are responsible for drafting documents for and negotiating with multiple parties.
• Some bidders may not be serious about acquiring the target company and are interested only in finding out information about a competitor. Sellers often try to minimize this problem by withholding competitively sensitive information (such as customer contracts) until late in the auction process.
• If the auction process does not result in a sale, the market (including the target company’s competitors, investors, customers, and other potential buyers) may think the target company is overvalued or in financial trouble.

If you want to learn more, please contact us.

Erik Lincoln is a founding member of Lincoln. In addition to being an attorney he is also a CPA. Erik has consistently been recognized as one of the top attorneys in North Carolina, by Business North Carolina.