Selling your business without a price in an M&A auction

by Sam Thompson

Do you know the value of your business? Many small business owners don’t, plus it’s not uncommon for them to have the majority of their net worth tied up in their business.

So, it’s important they receive top dollar for their “baby” when they decide to sell.

When a business owner decides to sell, their first step should be getting a valuation. This usually involves determining the value of their hard assets and goodwill using a multiple of cash flow (using either earnings before interest, taxes, depreciation and amortization or seller’s discretionary earnings). The next step is understanding what price they are comfortable accepting and working with an M&A adviser to get their business ready to go to market. What price will they put on their business? Do they decide to go to market without a price and offer an M&A auction?

An auction entails more work. Yet, if done effectively, it can provide a much better offer, including a higher price and better terms. Due to the growth in private equity and the large amount of funds PE firms have available for small business investments, auctions have become more popular the past 10 years.

Often, a business owner will be contacted by one buyer and mistakenly begin the selling process. Talking to only one buyer restricts the owner’s negotiating potential and transfers much of their leverage to the buyer. The seller finds themselves in the buyer’s “dictated” process that can include delays and retrading (reducing the price during the process).

Businesses sold during an auction process typically sell for 10-20 percent higher than the price our client is willing to accept. In one transaction this past year we saw a buyer pay 89 percent more than expected.

What exactly is an M&A auction?

There are various forms of auctions, yet they all include a process that involves competitive bidding. The business goes to market without a set price, buyers need to follow preestablished timelines to continue the process and the intermediary follows a protocol to maintain confidentiality (such as using blind profiles and securing non-disclosure agreements).

Auctions are either formal or informal. The formal auction has a well-defined process with the buyers knowing they are in an auction. An informal auction differs in that the buyers are aware there are other bidders, yet they may not consider it an auction.

it is important to point out, should a business owner agree to an auction, they are not obliged to sell at the best price and/or tems.

Businesses that are successful in an M&A auction

Not all businesses are right for an auction. Normally, Main Street businesses (those that sell for $2 million or less) are listed with a price and without set timelines. The buyers tend to be individuals or strategic buyers that insist on knowing the seller’s expected price.

Lower middle market businesses (those that sell for between $2 million and $50 million) and middle market businesses (those that sell for over $50 million) are good candidates for an auction. Buyers for those businesses tend to be more sophisticated and understand the buying process. The buyers are strategic and private equity firms that know business values and are comfortable participating in a bidding process.

A business that will do well in an auction has many potential buyers. To be successful in an auction the business owner needs to have done a good job of preparing their business for a sale by removing themselves from the business, minimizing customer and vendor concentration and having in place a strong management team.

The owner needs to understand an auction involves talking to numerous buyers and will take time; an auction can take four to six months, if done properly. A common auction can involve contacting more than 100 potential buyers, reviewing five to 15 indications of interest (IOI) and selecting a buyer from five to 10 letters of intent (LOI).

What does an M&A auction include?

The first month includes preparing the marketing materials. First, the blind profile (one pager that whets the buyer’s appetite without letting them know who or what the business is), then the confidential information memorandum or CIM (book on the business that is sent to the buyer after the non-disclosure agreement is signed and offers enough information about the business for the buyer to make an offer).

At the same time the marketing materials are created the buyer strategy is established. Who will be contacted and how (emails? phone calls? websites? a combination of all three?).

Months two and three include vetting buyers, sending the blind profile and CIM and receiving IOIs.

Months three and four include selecting the IOIs, inviting buyers into

the data room and buyer meetings. Next, the field of buyers is narrowed down to those that will be asked to submit an LOI. At this time, the data room will be updated. It’s important to note, all information is shared to buyers equally (no one buyer is favored) throughout the auction process.

By the end of the third and fourth months, the winning LOI should be selected. This buyer now has exclusivity and due diligence begins (normally 45 – 60 days) with a signed purchase agreement and closing to follow.

Should the transaction not go through with the selected buyer, there should be enough buyer interest that a buyer that was not selected may agree to revisit the transaction.

As a buyer, there are things you will want to do to make sure you don’t miss out on a business you’ve had your eye on should one hit the market. Be ready to take action once you receive the blind profile. Follow the auction strategy and timelines and make sure your financing is in place.

As a seller in an M&A auction, the value of your business can be driven up through the process that allows the perceived value of your business to determine the price paid instead of the value on paper. Successfully selling your business in an M&A auction will ensure the largest piece of your net worth becomes a valuable reality.

Contact: Sam Thompson is the president and founder of M&A firm Transitions In Business: 952.405.8470; sthompson@transitionsib.com; www.transitionsib.com; www.linkedin.com/in/samthompsoncbi