How Does an M&A Auction Process Work?

This article covers the basics of an M&A auction process for those of you considering selling your company.

As M&A advisors serving the lower middle market, we use auctions to maximize price and terms for seller clients. An auction is a type of structured sale process that involves competitive bidding. Auctions are incredibly effective when done properly, but are a ton of work and involve strategy and nuance. They are most effective in a strong M&A market like the one we’re in now.

Steps in an M&A Auction Process

  1. First we determine if the business and the seller are right for an auction. An auction is appropriate when multiple buyers are present and when our client is open to selling to more than one buyer. If either of these is not true, a serial negotiated sale process is likely more appropriate. As a general rule, most middle market and lower middle market businesses are auctionable and most main street businesses are not. An auction is usually not appropriate when a client is more interested in who buys the company than in maximizing value.
  2. Preparing a Confidential Information Memorandum (CIM) is the next step for the M&A advisor (a.k.a. broker, investment banker, etc.). The CIM is a prospectus on the company that contains 90% of the information buyers need to submit an offer. Offers can be in the form of an Indication of Interest (IOI) or Letter of Intent (LOI) depending on whether the auction will have one or two bid rounds.
  3. Broad auctions can involve over 100 target buyers. Limited auctions typically have anywhere from 2 to 20 targets. A broad auction is likely to involve two rounds of bids and a limited auction is more likely to have a single bid round. The decision to have one or two rounds can also also be driven by the need for speed of execution due to financial distress or market forces.
  4. The M&A firm conducts research and works with the client to develop a prioritized list of target buyers. The list may contain a combination of strategic and financial (private equity) buyers, depending on what type of transaction and continued involvement the client wants. The M&A advisor will help the seller understand these options.
  5. In a formal auction process, the CIM lays out a timeline for discovery, initial bids, site visits, final bids, etc. A formal auction is appropriate when we are certain that we will have multiple bidders or when speed is critical. In an informal process, dates are set later on.
  6. Next, we contact the appropriate executive at each target company/investor. After screening buyers for fit and obtaining non-disclosure agreements, we provide the CIM, grant data room access and address follow up questions.
  7. In a two-step auction, IOIs are generally requested next. The purpose of round one is to narrow the field of buyers to a manageable number for more detailed discovery. Only the top bidders are invited in for a site visit and meeting with company owners and top management. After these meetings, we update the data room and a issue a CIM supplement to the buyers still in the process.  Equally informing all bidders is critical to a successful auction.
  8. When we are ready, we send final bid instructions (a.k.a. bid process letter) outlining procedures and important issues that we want to see addressed in all LOI’s.
  9. Once final bids are in, we help the client, in conjunction with their CPA and attorney, select the best offer and negotiate a final exclusive LOI with one party. Due diligence and preparation of definitive agreements begin at that point. Unsuccessful bidders are notified.

How long does an M&A auction process take?

Typically 3 to 5 months from market launch to a signed LOI, depending on whether the auction is broad or limited, formal or informal, one or two rounds. Expect another 2 to 3 months to close the transaction depending on the buyer, scope of due diligence, financing needs, third party consents and other factors. When a compressed time frame was required, we’ve done these in as little as 3 months start to finish.

A well-run auction processes can have a substantial impact on the value and terms received by sellers. In one recent eight figure deal, we had 115 target buyers, 11 IOIs in round one and 5 LOIs in round two. The elapsed time from market launch to closing was 6 1/2 months.

Al Statz is a senior M&A advisor in Exit Strategies Group’s Sonoma County California office. For more information on M&A auctions or to discuss what type of sale process best suits your needs and your company, Email Al or call him at 707-781-8580.