Selling Your Business [M&A Series: Part One] Investment Bankers: Two Reasons to Consider Going to Auction

When it’s time to sell your business, you have a variety of options. But which one is right for you? In this four-part series, we’ll explain and explore the 4 most popular avenues for selling your business.

If you’ve never been to an auction of any kind, using this method to sell your business may have never crossed your mind.  But hiring an investment banker to sell your company at an auction may be your best bet, and better yet, your best payday. Here are two reasons to consider an auction when selling your business.

1. An auction creates competition.

As the old adage goes, a little competition never hurt anyone — and auctions are all about competition. Here’s how it works: You’ll hire a recommended M&A investment banker (called your advisor) who will prepare a confidential memorandum, which describes the company’s stock or assets to be sold, as well as the business opportunity for the acquirer. Then, they’ll send it to 15 or so “buyer prospects” who will, eventually, submit a range of offer prices based on variables put in place by your advisor.

Inevitably, some buyers will get this call: “Unfortunately, we have another buyer who’s willing to pay more.” If they’re really interested in your business, it’ll show in their offer. As your advisor works your leads to find the lead buyer, rest assured that hearing that your offer “isn’t good enough” won’t sit well with everyone.

Selling your company this way creates a sense of urgency in buyers since the companies interested in buying your company only have so much time to put in their bids. It’s also outside validation that your company is worth something, and enhances buyer perception due to multiple companies having different perceptions of what your company is worth. This creates a fear in buyers that they could lose the bid, and fear can be a good motivator to put it all on the table — and in your pocket.

2. Your auction advisor knows the ropes.

If you’ve never sold a business before, working in this partnership with your advisor can create a feeling of comfort in a stressful situation. Even though you might be used to running the show, taking a backseat and letting your advisor lead the intricate dance of an auction, a scenario where a seller typically isn’t involved in the front lines, is worth your while.

“A good investment banker brings the same sophistication to the client’s side of the transaction,” says John R. Hammett, Managing Director of Corporate Finance Associates in Minneapolis, MN. “Maximizing company value means selling to high-value buyers, and high-value buyers are sophisticated dealmakers.”

Hammett’s clients, who come to him when they’re ready to sell their business, are typically first-time and last-time sellers: they’ve never done it before, and they’ll likely never do it again. Part of John’s charter is to get the most he can for his client’s soon-to-be-sold business, and he’s achieved this through methods like increasing interest rates on seller’s notes and negotiating escrow and various language changes that can be made to the legal documents associated with selling a business.

“I believe that the sale of a company is the time for the owner to be paid for the long hours, skipped paychecks, having to fire friends, guaranteeing bank loans and all the other aspects of being an entrepreneur,” John said. “Our goal is to make that final payday worthwhile.”

In part two of this series, we’ll cover options that private equity firms typically offer when you’re looking to sell a portion or all of your business. Stay tuned!

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