Targeted auctions give business sellers some control over which buyers are allowed to bid on their companies. Here’s how they work: A seller specifies the number of buyers allowed to bid and narrows the pool to qualified prospects — generally, buyers with strong strategic motivations and adequate financial resources to make an acquisition.
For in-demand companies, a targeted auction can simplify the process of selling. But such auctions also have drawbacks, such as a potentially negative effect on the ultimate purchase price.
Sellers usually don’t have the time and resources to secure competitive bids from a wide variety of potential buyers. Founders of smaller businesses, in particular, may be too busy with day-to-day operational demands to devote their attention to attracting and analyzing prospective bidders. A limited auction offers a more efficient and structured way to assemble a buyer pool.
Targeted auctions are also appealing to companies in niche sectors or that offer specialized services. Typically, these businesses have trouble attracting enough buyers on the open M&A market to encourage competitive bidding. A targeted auction helps them get the word out to interested buyers, including those that may not already have the selling company on their radar.
Because it’s easier to track a small number of prospective buyers, targeted auctions also help sellers limit access to proprietary information. What’s more, there’s generally less impact on the company’s operations during the sale process. Due diligence can be conducted quickly and postmerger integration runs more smoothly when a seller has already “preselected” its buyer.
If you’re a seller who has decided to pursue a targeted auction, you will start by writing a confidential information memorandum to attract potential buyers. (See “Make your case with an information memorandum.”) You’ll then approach anywhere from five to 40 buyers to assess their interest and motivations for making an acquisition.
The advice and assistance of an experienced M&A advisor is essential here. Your advisor can help you cast your nets widely to find the best-qualified candidates and to assess the individual merits of each. Your advisor is likely to suggest you eliminate from consideration any potential buyer without the current financial means to make a satisfactory offer. You also want to set an offer deadline and cap participants at no more than 10. This enables you to separate the serious buyers from those just sniffing around for bargains.
Finally, conduct one-on-one negotiations with buyers on the shortlist. Give each buyer the opportunity to make a formal offer by an agreed-upon date.
Despite the many advantages for sellers, targeted auctions aren’t without risks. By restricting your buyer pool to a select few, you may reduce your chances of receiving an outsized offer from certain types of buyers, such as private-equity funds.
Another possible disadvantage is that, with a small group of buyers, each one is likely to be aware of the others’ acquisition strategy and financial strength. A buyer could be more conservative in its initial offer and more aggressive in its deal terms if it feels confident that other bidders won’t make a competitive counteroffer. Or the bidder might know that competing bidders will post higher offers with the intention of reducing them after due diligence is conducted.
A limited auction can make a business sale more efficient and lucrative. Such a system also provides sellers with a safety net. Should a buyer decide to change its offer during negotiations, sellers can always return to the auction pool to assess competing bids. But it’s important to also be aware of the possible risks.
Sellers participating in a limited auction must prepare a confidential information memorandum (also known as an offering memorandum). This company overview is sent to buyers who have signed a nondisclosure agreement to protect confidentiality. The memorandum is required, but it also provides sellers with an opportunity to attract and encourage the kinds of buyers it wants.
To make a strong case for your company:
Keep it concise. Highlight key selling points — from best-selling products to technological innovations to the achievements of top managers. Answer any obvious questions (such as those related to performance anomalies) succinctly. Limit the length of your memorandum to 30 pages, or, even better, aim for 10.
Maintain a tight timeframe. Remember that this document is intended to hook potential buyers, so focus on the past three to five years. Interested buyers can request a more thorough company history later on.
Don’t oversell. Highlight your company’s strengths but don’t exaggerate or make claims that you can’t back up. Likewise, don’t downplay weaknesses. Instead, address them as well as solutions to them.