Business owners often consider selling their company at some point, whether this was always the intention or in response to market conditions.
If a decision has been made to sell the company the next question to consider is whether to sell the company via an auction sale or a bilateral sale. This article explains a typical auction process in a M&A transaction from a seller's perspective, showing how a well-structured auction process can attract serious buyers, maximise sale value and help you as the seller stay in control of the process.
What is an auction sale?
An auction sale is a multi-stage process in which two or more bidders bid to acquire the business also known as the target company, as opposed to a bilateral private sale where the seller has already identified a single buyer to enter into the transaction with.
What are the stages of an auction process?
Preliminary Stage
The seller will assemble a team of advisers and set out clearly each member's responsibility at an early stage. The team will usually consist of a financial adviser, legal advisers, reporting accountants and key managers of the business. The financial adviser will lead the process and start by contacting potential bidders who may be interested in acquiring the target company. Potential bidders will be required to sign a confidentiality agreement with the seller prior to receiving a copy of the Information Memorandum (IM).
At this juncture, the legal advisers typically prepare a vendor legal due diligence report on the target company to identify and where possible, resolve, any underlying issues relating to the target company in order to avoid any undue delay to the process.
Stage 1 – IM and Non-Binding Indicative Offers
The IM is a comprehensive financial and commercial report on the target company that contains information the bidders would need to submit an offer (i.e., a description of the target’s business, industry and history; the principle assets; historical financial information and future projections; information about management and employees; and depending on sensitivity of the transaction, information about key customers and contracts). The bidders may have the opportunity to ask limited questions about the information provided.
A process letter will also be provided to bidders by the financial adviser to communicate a clear and definitive framework for the auction process such as timetable, process, and next steps, and will invite bidders to submit a non-binding indicative offer.
Following the submission of non-binding indicative offers, the seller and its advisers will assess the offers, and invite a smaller group of preferred bidders to participate in the next round of bidding.
Stage 2 – Due Diligence and Transaction Documents
During stage 2, the preferred bidders will be provided access to the virtual data room (if not already provided in Stage 1) containing a significant amount of due diligence information covering financial, legal and operational matters or, if a vendor legal due diligence report has been prepared, the report. Preferred Bidders may also have the chance to engage with the seller’s advisers on due diligence calls and certain key individuals of the target company via management presentations.
At the same time, the preferred bidders will also be provided with a draft sale and purchase agreement (SPA) together with a disclosure letter containing disclosures against the warranties in the SPA prepared by the seller's legal advisers. The contents of the SPA will be seller friendly, and preferred bidders will be expected to make the minimum amendments required to reflect the commercial points that are important to them.
Following the due diligence exercise, the remaining bidders will be invited to submit their final offers together with a mark-up of the SPA and the disclosure letter, which will be in a form that they are willing to sign.
Stage 3 – Final Bidder and Completion
Upon the seller’s assessment of any final bids, the final bidder will be selected, and the final negotiations will take place to reach an agreed form SPA and disclosure letter that can be signed.
While the final bidder should have provided a mark-up of the SPA and the disclosure letter that it was willing to sign, in practice the documents are usually negotiated further in the final stage of the process.
The auction process is a common route in M&A transactions offering competitive tension and pricing advantages for the sellers. However, it requires careful preparation with strong legal and financial advisers who provide critical backbone support. From preparing due diligence to executing the final agreement, your advisers are crucial to unlocking the auction benefits and giving you the best chance of a successful and high value exit.
