Avoiding the Auction Process
Most companies that are publicly for sale are being offered through a merger & acquisition auction process. The business auction process skew most of the information flow and negotiation power in favor of the seller. Although assuring the buyer that the seller is motivated, business auction sales are very rarely buyer centric or beneficial. Probably the biggest drawback to the buyer is the mere fact that he/she does not exactly know what he/she bought. We will give you a brief synopsis of our rational for making such a statement and also why it is in the buyer's best interest to pursue non-auction sale. Keep in mind that most great deals are proprietary where the seller was not contemplating or publicly offering the business for sale.
There are several reasons for a buyer to restrict involvement in auction deals. We will take a closer look at 4 of these namely a) price, b) time and information restrictions, c) management access, and d) contract and term negotiations.
Price
There are several studies that indicate that deals struck in a proprietary fashion results in a selling price 1-2 EBITDA multiples lower than the comparable sales done through an auction process. This is very easily understood as the auction process facilitates competition between multiple bidders and hence drives the price in the seller's favor.
Time and information restrictions
The advent of secure extranets known as virtual data rooms have given the seller increased ability to control and limit the information in a business auction process. Although the utilization of virtual data rooms has proven valuable in facilitating the process, it avertedly reduces the time allotted for adequate buyer due diligence. Moreover, limited access to management leaves interpretation of the disseminated information to the buyer.
Management access
As mentioned above, buyer's access to management is limited in a business auction process. Not only does this constitute a problem when interpreting disseminated information, but it also limits the buyer's ability to evaluate management itself. This is of particular concern to silent owners such as private equity firms who not actively participates in the daily management of the acquired business.
If you have any questions on the above material or want to know how KDS Capital can help you in your venture, feel free to call us at 602-490-0723 or toll free 800-880-0717.