5 Reasons An Auction Is the Best Way To Sell Your Company
BY Max Safavi
The dynamics of an auction are different than those of other sales. Here's how that can work for you.
Going… Going… Gone!
We have all heard this phrase at an auction. And have you ever paid more for an item at an auction than you could have paid for the same item in a store?
You can buy everything from old farm equipment to fine art at auctions. Even cruise ships have capitalized on auctions by selling artwork to a captive audience in the mood to spend money.
However, most business owners do not realize that a silent auction can be the best way to maximize the value of your company when you sell. Experienced investment bankers know how to tap into the potential of an auction-style sale to boost a company’s price and secure better terms. They know how to get prospective buyers tuned up, turned on and excited about the opportunity to acquire the business. Then the acquirer is motivated by the opportunity for gain, and approaches the auction with a “What’s in it for me?” attitude.
When the auction begins the buyer realizes right away that there are other buyers at the table. Typically, he doesn’t like to see others bidding on the company. However, it confirms his belief that the company is a real opportunity. Now, the dynamics of the sale shift. The buyer’s mindset goes from “opportunity to gain” to “fear of loss.” This drives buyers to raise their bids. The buyers are convinced that the opportunity for gain is real. Yet, fear of loss drives them to increase their bids to try to keep the company out of competitors' hands.
Five factors are at work during an auction. Together, I like to call them the auction effect.
In today’s business world, nobody likes to lose. Everyone wants to win! A lone buyer looking to buy a company does not feel any competitive pressure. They are the only game in town. They can offer whatever they feel the company is worth, and the seller has nothing with which to compare the offer.
However, when you have multiple potential buyers, all of whom want the same company, they feel the competition. The seller has other offers to consider. The price goes up! Auctions provide built-in competition for your company.
Enhanced Buyer Perception
The true value of a company is not always determined by the assets of the company or by its performance. The true value of a company is what a buyer is willing to pay based upon their perceived value of the company. This has been proven over and over as billions have been spent on internet companies that have yet to make a profit. The buyer’s perceived value defied normal business rules.
A single buyer values a company based upon the value they see. During an auction, multiple buyers are looking at the company, and each has a different perceived value. A strategic/corporate buyer may see the company as the perfect strategic fit. A financial/private equity buyer may see the same company as less attractive, because its potential ROI is not ideal, but still very attractive.
When you multiply the number of buyers, the perceived value is enhanced. Each suitor sees the company in a different light, yet must compete with others to win. The perceived value increases.
There are no time constraints on a company being sold without an auction. No deadlines, no pressure. If you only have one potential buyer, they don’t feel any pressure to increase their offer or to negotiate. They can just wait around until you accept their offer.
An auction is different. It can have a definite ending. Bidders know they are competing for your company and if they want to win, they have to present timely offers. They never know when the company owner may agree to accept another offer, and they don’t want to miss the opportunity. Bids go up - values go up!
Often buyers need to know that others see the potential value of a company before they will make a serious offer. An auction provides ongoing external validation that the company being sold is attractive and that the offers are realistic, based upon the market.
Fear of Loss
Potential buyers have a vested interest in the company they want to purchase. They have done their homework. They have determined that this is the best company of its type for sale at this time. Otherwise, they would simply wait and buy the next one.
During an auction, buyers may fear that if they lose the auction, they may not get another chance to purchase a company like this one. This fear drives buyers to increase their offers or negotiate better terms.
Not only does an auction help to enhance company value, it also provides the seller with more negotiating power. The seller can work with potential buyers to craft the perfect offer that more closely meets both their financial and personal goals.
Before your company is going-going-gone, make sure you investigate an auction-styled sale. It can ensure you get the best deal before the gavel drops.
MAX SAFAVI has executed more than $400 million in mergers and acquisitions transactions and served as CFO for Microdyne and EF Johnson Technologies. He is a graduate of the Wharton School of Business and a Vice President at Allegiance Capital Corporation. @MiddleMktMandA