Every experienced investment banker and M&A attorney recommends this process because it is simply the best way to maximize the sale price for the business and achieve the business owner’s other goals during the sale.
Sell My Business Series
If you are a business owner who is starting to explore the sale of your business, you may have heard the term “M&A Auction Process”. The term may not mean much to you yet, but it is the primary process used by Waypoint Private Capital and every other good investment banking firm when selling companies. The word "auction" is derived from the Latin word augeō, which means "I increase" or "I augment."
In this article we will first describe the steps in the M&A auction process, then explore the rationale for using this process.
Steps in the M&A Auction Process
The steps in the M&A auction process, as shown in the graphic below, are well defined.
Step 1 - Go to Market
In the first step of the process, we work with you to compile a list of potential buyers that will include strategic buyers (competitors, customers, suppliers, and others tangential companies in your industry) and / or financial buyers (private equity firms, family offices, or high net worth individuals). That list could be anywhere from 20 to 300 potential buyers.
We will then send an executive summary (often called a “teaser” by industry professionals) to those buyers that gives an overview of the company, but doesn’t include the company name. We also send them a Confidentiality & Non-disclosure Agreement (“NDA”) with instructions to sign and return the agreement if they would like to receive additional information about the company. Interested potential buyers will sign and return the NDAs to us, then we will send them the Confidential Information Presentation, which is a very detailed description of every major aspect of the company being sold. If the initial list had three hundred potential buyers, we would expect to receive approximately sixty signed NDAs back. We will answer initial questions the buyers have about the company and further highlight the strengths of the company and the opportunity for the buyers.
Step 2 - Indications of Interest
The second step is where the true “auction” starts. After all potential buyers have received the Confidential Information Presentation and we feel the buyers have enough information to make a well-informed decision, we will set a specific date and time by which Indications of Interest (“IOI”) are due. We send all interested buyers a “Process Letter” communicating the submission deadline as well as everything we want to see in the IOI, which will include:
the valuation for the business (they often give a valuation range at this stage)
their assumptions in determining that valuation
the structure of the acquisition (asset sale, stock sale, etc.)
how they plan to finance the acquisition (e.g. 70% debt and 30% equity)
their sources of funds
their acquisition rationale
their intentions for the owner and management team
the timing in which they can close the acquisition
and a few other terms
This essentially mimics a sealed bid auction, where none of the potential buyers knows who else is going to make an offer for the company or the valuation they will place on the company. This gives everybody an incentive to put their best offer forward.
Indications of interest are usually emailed to us throughout the week preceding the deadline. Following the IOI deadline, we review the IOIs received and put the terms from all the IOIs in a spreadsheet so they can easily be compared on a side-by-side basis. We then review the IOIs with the seller, discussing the positive and negative aspects of each IOI and profiling each of the buyers.
If sixty buyers were interested enough to sign the NDA, it’s likely that only fifteen would send an indication of interest. In comparing the IOIs, we typically see a couple of potential buyers that have higher offers than the rest of the group, a few whose offers are lower than the group, and the remainder that have similar offers to one another. After some follow-up conversations with the buyers, we will then select the group of buyers with whom the seller wishes to move forward, and let the other buyers know their offers weren’t adequate. At the end of this step, we will usually be left with seven to ten remaining potential buyers.
Step 3 - Management Meetings
Now that we have significantly narrowed down the group, we are ready to let them interact with management and have access to more information. Earlier in the sell-side process, as we were putting together the Confidential Information Presentation, the Executive Summary, and the Financial Model, we were gathering quite a bit of information from the company and putting electronic versions of that information into a cloud-based data room. As soon as we get into this stage of the process, we will give the remaining buyers access to that data room so they can continue learning more about the company. We will also invite them to travel to the company location to meet the management team and tour the facility. Each buyer is usually given up to one half day to meet with the management team and tour the facility.
Step 4 – Letters of Intent
The final step of the auction process is similar to the second step. We set a specific date and time by which Letters of Intent (“LOI”) are due. The LOI is similar to the IOI, but firms up some of the terms that were a bit loose in the IOI. The valuation range will now be a single valuation number, they will name their financing sources, and they will highlight any areas they will focus on during due diligence. For larger deals that have a draft of the purchase agreement in the data room, they will also highlight any areas of concern or disagreement with the purchase agreement.
After receiving and reviewing the LOIs, we will once again put the terms from all the LOIs in a spreadsheet so they can easily be compared on a side-by-side basis, and we will review them with the seller. If we invited ten buyers to the management meeting stage, we are likely to get seven LOIs. Two or three will stand out immediately as having the best valuation and overall terms, so we will focus our attention on those buyers.
The process still feels like a sealed bid auction in which the potential buyers have significant information about the company, but very little information about how many buyers remain in the process and what terms those buyers are offering. We have a strong information asymmetry in favor of the seller at this point, so maintain all the negotiating power. We use that negotiating power in our final push to negotiate the best possible terms for the seller.
The seller then makes reference calls on the final group of potential buyers. We meet with the seller and discuss not only deal terms, but how they feel about selling to each of the potential buyers, if any red flags popped up during reference calls, how well we feel the buyer understands the company and if they reviewed all the information in the data room (our data room allows us to see exactly which documents were reviewed by each buyer), and if there are any concerns we have that the buyer won’t be able to close on the terms we are all agreeing to. Then the seller decides on the buyer with whom they want to move forward, and they sign the LOI.
When the LOI is signed by the buyer and seller, the auction process is concluded, and everybody moves into the due diligence and closing phase of the sale process.
Benefits to the Seller of Using The M&A Auction Process
We are continually talking to business owners who are thinking about selling their businesses and those who have already sold their businesses. When talking to those who have already sold their businesses, we’re always surprised to find out how many business owners sold their business through a one-on-one negotiation with a buyer who approached them. If only they knew about the benefits of the auction process, they never would have entertained an offer from a single buyer. Business owners benefit from using an M&A auction process in the following ways:
1. Competition
When a company hires an investment banking firm, spends the time to put together high-quality offering materials, then goes to market, they are sending a strong signal to potential buyers. They are signaling that they are a serious seller, and the process is being broadly marketed, so it will be competitive. Further, there is a self-selection aspect to the process. Because buyers know they will be in a competitive situation, only serious and qualified buyers will spend the time pursuing the acquisition, while tire kickers will quickly eliminate themselves from the process.
2. Superior Offers
The competitive nature of the auction process motivates buyers to put their best foot forward to outbid other buyers. Whether driven by the desire to win, or the fear of losing the opportunity to a competitor, the auction process leads to superior offers.
3. Increased Seller Negotiating Power
The asymmetry of information involved in the process strongly favors the seller and gives them significant negotiating power. As soon as the company goes to market, their investment banker starts collecting information that none of the buyers have. Potential buyers don’t know how many buyers are interested in acquiring the company, how many buyers submitted indications of interest or letters of intent, or what the terms are in those offers. They don’t know the strategic reasons others may have for wanting to acquire the company or how other buyers are evaluating the opportunity. The potential buyers only know that you are working with an investment banking firm who is conducting an M&A auction process to sell the company, so there will be competition. They need to present a strong offer if they want to be successful. The seller has full information about all the competing offers and what they have communicated about their motivations for acquiring the company. That information significantly increases the seller’s negotiating power.
4. Accelerated Timeline
The presence of strict deadlines combined with the level of preparation prior to going to market ensures that the process moves efficiently. This prevents unnecessary delays and gives less room for potential buyers to stall the process.
5. Likelihood of Closing
The upfront preparation by the seller, the level of diligence the buyer must demonstrate to have a competitive offer, the management meetings, and the availability of the investment bankers to answer buyers questions during the sale process help to ensure that buyers are fully informed prior to submitting LOIs. Fully informed buyers aren’t likely to uncover surprises during formal due diligence that will derail the sale. By fully informing buyers up front and discussing all key issues with potential buyers, the auction process increases the likelihood of successfully closing the transaction.
When selling your business, the M&A auction process can be a powerful tool to maximize the valuation of a business and secure the best deal possible. But the seller shouldn’t approach the biggest transaction of their life on their own. Engaging the right professionals to guide you through the M&A auction process is critical. The team at Waypoint Private Capital has worked with hundreds of business owners to help them navigate the complexities of the sell-side M&A process. We would be happy to help you better understand the M&A sell-side process and how we work with business owners during that process to achieve the best possible outcomes.
Read other articles in the Sell My Business series:
About Waypoint Private Capital
We are an investment banking firm that provides lower middle-market clients the quality of
investment banking services typically available only to large companies. Waypoint helps privately-held business owners sell and buy companies, raise equity and debt capital for growth and recapitalization, and plan for a successful exit from their business.
To learn more visit waypointprivatecapital.com or call us at 608.515.3354 or 918.633.2647 and speak with a Waypoint Private Capital expert.
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