When selling a business, an owner has a variety of options, such as looking inside the company for a buyer or looking for an outside entity. In the event of a sale to a third party, a mergers and acquisitions (M&A) auction, usually generates the highest value for the seller under the right conditions.
Matthew Brunstrum of Chicago, Illinois, is an advisor with Sun Acquisitions & MCB Advisory LLC. His focus is maximizing value for his clients, which he says can be achieved through the M&A Auction process. While auctions are sometimes associated with asset liquidation, there are specific advantages for a seller of a business in an auction when the right strategies and processes are in place, he adds.
Targeting Potential Buyers
The key to creating value is attracting multiple offers and creating competition, as opposed to having only a single offer on the table, says Matthew Brunstrum. That's why it's advantageous to open the process up to multiple buyers in an auction. But how a seller approaches potential buyers can vary — they can open it up to the masses or target a few potential buyers instead.
An advisor can help a client develop a targeted list of buyers that can include a mix of private equity or strategic buyers, each bringing their own unique motivations to the table. In the case of a broad auction, that can amount to more than 100 potential target buyers.
The broad but confidential method can fetch high offers (and therefore high value) because it doesn't limit the field, but it does carry some risks. For example, some of the bidders might be looking to gain insight into the seller company rather than acquire it. Because of the more public nature of a broad yet confidential auction, there can be more resources required towards marketing online and on the phone to cast a wide net to potential buyers.
Narrowing The Field
However, while formal auctions are popular with public companies (as they are also required to disclose certain information), a limited auction process can be an advantage for the seller of a lower middle market business. These are more confidential in nature as they involve a much smaller pool of qualified bidders), which are contacted in a discreet manner.
Matt Brunstrum says one of the advantages of limiting the bidding is that it can build buyer confidence — because they'll know from the outset that they aren't competing in a large field, which may deter some offers. For example, if a suitable buyer is leaning towards the purchase but is on the fence due to the fact they aren’t they only interested party, it's an opportunity to ask for more money in exchange for a signed letter of intent with exclusivity clauses.
One or Two-Step Bidding
Another consideration is whether to have one of two rounds of bidding, explains Matthew Brunstrum. A one-step process may be more suitable if a deal needs to be reached more quickly while a two-step process can create even more value, he notes.
In the one-step process, the field of bidders will be presented with a Confidential Information Memorandum (CIM), which will have been prepared ahead of time by the advisor. The CIM will contain most of the information a potential buyer needs to make an offer, usually in the form of an Indication of Interest. The hope in this method is to generate a stream of offers or valuations that can be examined more closely before opening individual negotiations.
Meanwhile, a two-step process follows stricter deadlines for buyers to submit offers, which are presented to the interested parties up front. After gathering the initial expressions of interest, the advisor and seller can narrow down the pool to the best candidates depending on deal structures and valuations. It will invite the potential buyers to submit a Letter of Intent and to learn more through management presentations and detailed data rooms in the hopes of generating higher offers.
For a business in the lower middle market that is highly attractive to buyers, the two-step process can be the most effective in generating value but can also take a minimum of six months or more to close.
Other Value Considerations
Getting the highest bid is generally the objective when it comes to selling in an auction. But in the case of a business auction (and with any sale of a business), there can be other considerations that could increase the value of the transaction in favor of the seller, notes Matthew Brunstrum.
For example, the buyer may want to keep all the existing employees of the business on board after the deal is finalized. How long the existing owner will have to stick around for a training and transition period is also a big factor depending on the owner’s post-sale plans.
The way the purchase is structured and financed can also be a consideration. The buyer may offer mostly cash, include a promissory note, or they might also offer their own stock as part of the deal. In the latter scenario, the value of this arrangement is dependant on the ongoing performance of the buyer, which can be risky, notes Matthew Brunstrum. The seller should also consider tax implications connected to different deal structures as well which can vary based on a seller’s assets and annual income, he adds.
Matthew Brunstrum on Choosing the Auction Route
Putting up a business through a M&A auction can be advantageous to a seller as it inherently creates competition (and usually maximizes value), notes Matt Brunstrum. However, the seller should be aware of the extended timeline of this type of transaction — it's not like a traditional auction where bids are made and the buyer leaves with the item. It's a very complex procedure with several steps that require strategic initiatives and careful planning
Having an experienced M&A advisor is key to navigating the M&A auction process, which will ultimately lead to the most value for clients.
