Smarter Thinking

Why SMART Sellers run Auctions

4th September 2018

By Piers Hartland-Swann

When it comes to selling a business, our aim for our clients is always to ensure that the buyer pays the highest price they can pay for the business, while still being a win-win deal for both parties. An auction process is a proven, structured way of ensuring this happens. It brings multiple buyers to the table who must bid simultaneously against each other. This creates competitive tension – to have a chance of winning, the buyers must bid at their highest strategic value.

What are the benefits?

No buyer wants to overpay. Even when you are negotiating with someone who you’ve known for a long time and trust, this rule still applies.

When you’re negotiating an agreed deal with only one party, no matter how well you know them, you have no way of knowing how much they would really have paid in competitive circumstances. In a different situation, they might have been willing to pay a higher (and potentially fairer), price for your business, but the chances are, if they are the only bidder, they will pay the minimum they think you will accept. Another consideration is that the process can become lengthy as the buyer has little or no incentive to move quickly.

Negotiating with multiple parties over time is likely to deliver a similar outcome. A series of unstructured conversations with different buyers gives them little real incentive to offer their best price unless there’s a clear end point.

What an auction process does is to bring all of the buyers together in a structured way so that you can see who is willing to pay what at the same time, each basing their decision on the same information about your business. Now they’re in competition with each other, buyers have a reason to improve not just the price but also other terms of their bids.

How do I optimise the outcome for my business?

At FirstCapital, we follow our SMART methodology to ensure both parties get optimal value for the transaction. Not only do we ensure we understand our clients’ objectives, but we invest significant time talking to and analysing the strategic buyers to understand what they are looking for and where their key priorities lie. So by the time we reach the negotiation stage of a deal, we have a strong list of motivated and engaged buyers who have expressed their interest and are willing to bid.

Once you are ready to enter the negotiation phase, there are several ways you can ensure you maximise buyers’ bids.

Tip #1: Run a Structured Process

The best way to understand the maximum price a buyer is willing to pay for your business is to create competition. If you run a structured process it is clear that the buyer is not the only bidder you are talking to.

Setting a clear timetable that buyers need to follow gives them the ammunition they need to move through their own internal processes in a timely manner. There should be a specific date by which buyers need to submit their bids, details of further bidding rounds if applicable, and information about what will happen if they are the winner (for example if there will be an exclusivity period). A structured process demonstrates to a buyer that if they want to be the winner, they only have a specific window of opportunity to provide a good bid.

A good advisor will have considerable experience in running a well-structured process, as well as having strong relationships with many of the likely buyers, and will provide a lot of value.

Tip #2: Leave it to their Imagination

Negotiation is all about information. In an auction, knowledge of the identity of the other buyers is incredibly valuable. If a buyer knows who else is in the running, they can estimate how much the others might be willing to bid and how likely they are to win. You should therefore never tell any of your bidders who else you are talking to. You do, however, want your bidders to assume that you are also talking to their competitors as this will most likely motivate them to try to win, and therefore maximise your chances of getting the best possible price for your business.

The smart thing to do is to make it clear that you are talking to all the logical buyers without revealing their identities – have all communications go through your advisor so they can tightly control the flow of information. Engaging with an advisor who specialises in your industry will equally show buyers that the assumed identities of the other buyers in the process are more likely to be correct, as they will know that the advisor will engage with all the key players.

What is the expected outcome of an auction?

In an auction, buyers know that they have a limited period to submit a bid that is good enough to win. A structured, competitive process will encourage buyers to move quickly and not to waste time. In our experience, this is what delivers the fastest and best results in a transaction. You know that you have maximised the value that your buyer is prepared to pay (of course you do not have to choose the highest bid if another party is a better fit) and you can confidently complete the deal in the knowledge that you’ve optimised the outcome and delivered the best result.