How Does an M&A Auction Process Work?

An auction is a type of sale process that produces competitive bidding. M&A advisors often use an auction process to maximize price and terms for their seller clients. Auctions, while simple in concept and incredibly effective when done properly, are a ton of work and involve strategy and nuance. Auctions are most effective in a strong M&A market like the one we’re in now. This blog explains the basics of an M&A auction process.

Here’s what happens 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 the seller is open to selling to more than one buyer. If either of these is not true, a serial negotiated sale process is likely the more appropriate approach to take. Most middle market and lower middle market businesses are auctionable, and most main street businesses are not auctionable. When a seller client is more interested in who buys the company than in maximizing value, an auction is usually not appropriate.
  2. The next step for the advisor (a.k.a. broker, investment banker, transaction intermediary, etc.) is to prepare a Confidential Information Memorandum (CIM) on the company, i.e. prospectus, that contains 90% of the information buyers will need to submit an offer (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 and limited auctions typically have anywhere from two to ten 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 may also also be driven by the need for speed of execution due to financial distress or market forces.
  4. While preparing the CIM, the M&A broker will conduct research and work 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 is interested in. The broker 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 more appropriate when we are certain that we will have multiple bidders or when speed is critical. In an informal auction process, dates are set later.
  6. Next, we contact the appropriate executive at each target company. After screening the buyers for fit and obtaining non-disclosure agreements, the CIM is provided, data room access is generally granted, and the broker works with each buyer to answer additional questions.
  7. In a two-step auction, IOI’s are generally requested next. The purpose of the IOI 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, the data room is generally updated and a supplement to the CIM is issued to all buyers still in the process. For an auction process to succeed, it is critical that all bidders are equally informed. When we are ready, we send final bid instructions (a.k.a bid process letter) outlining all of the important issues that we want to see addressed in an LOI.
  8. Once all the bids are in, the  client, in conjunction with the advisor, CPA and attorney, typically selects the best offer and we negotiate a final exclusive LOI with one buyer. Due diligence and preparation of definitive agreements begin at that point. The unsuccessful bidders are notified.

How long does an M&A auction process take?

Typical is 2 to 5 months from market launch to a signed LOI, depending on whether the auction is broad or limited, formal or informal, or one or two rounds. Then expect another 2 to 3 months to close the transaction depending on the buyer, the scope of due diligence, financing needs, third party consents, and many 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, and can compress the overall timeline. In one recent eight figure deal, we had 115 target buyers, 11 IOI’s in round one and 5 bids (LOIs) in round two; and 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, contact Al Statz at 707-781-8580 or