Whilst some sellers may proceed with selling a business through traditional two-way negotiations, an alternative is to sell through an auction where multiple potential buyers bid for the target business.
This post considers some of the advantages and disadvantages of selling a business in this way.
Advantages for the seller
Auction sales are generally more favourable to a seller. When compared with a traditional sale, a seller will have access to a wider pool of potential buyers of the target business. Not only does this boost the chances of selling the target, it creates a more competitive environment where the seller can play bidders against each other in order to achieve the highest possible price.
An auction sale may also allow a seller to negotiate better sale terms as it is the seller who prepares the first set of transaction documents, which are then open to the bidders to negotiate. A bidder is more likely to limit their amendments and accept the seller’s terms in an attempt to increase its chances of securing the target company.
The seller can also drive the transaction by controlling the timetable of the deal, accelerating execution of the deal and encouraging bidders to make timely offers.
Unsurprisingly, these advantages to a seller result in equivalent disadvantages for the bidders. However, there are a number of additional concerns for those bidders to consider.
Regardless of how a business is sold, there will always be a risk that the sale may fall through. But the element of competition between bidders in an auction sale increases this risk. This leaves bidders vulnerable to spending a significant amount of time and money on investigating and pursuing a target business which may eventually be sold to a different bidder.
Another concern for a bidder will be the lack of control over the transaction. The seller has control over the due diligence process and so the bidder can only investigate the target using the potentially limited information provided to it by the seller.
Whilst it may appear that an auction sale works predominantly in favour of a seller and is to the detriment of bidders, there are possible disadvantages of an auction sale for sellers.
Disadvantages for a seller
Although the seller benefits from controlling the transaction process and drafting the first round of documents, this inevitably means that transaction costs are higher than on a traditional sale. There are also issues relating to the practicalities of controlling the transaction. If this process is managed by current employees this could distract them from their current role in the business, which could have an adverse impact on the business and ultimately the price being paid for it.
Another key concern for a seller will be the number of parties involved. Multiple potential buyers will have access to a significant amount of sensitive information and so confidentiality is a bigger risk than on a traditional sale. Although the bidders will be subject to confidentiality agreements, it can sometimes be hard to manage and protect information flow, as well as to detect when confidential information has been relied on.
Perhaps one of the most important things for a seller to consider is the risk of the auction not resulting in a sale. If an auction does fail it may become public knowledge, potentially damaging the reputation of the target and the potential of a future sale with the target being seen as ‘damaged goods’.
Overall, whilst there are pros and cons of auction sales for both sides, it is evident that sellers have the upper hand. However, that is not to say that sellers are free from risk, so all parties need to consider both sides of the coin before proceeding with an auction. Seeking advice from financial advisers, lawyers and accountants and engaging these parties early in the process will assist a seller in deciding which route to take and help to ensure the journey is a smooth one.
This blog post was written by Sarah Souter, Associate, Corporate and Katie Rice, paralegal, Corporate.
For further information please contact:
Sophie Brookes, partner, Corporate Unit
T: 0161 836 7823