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Mergers and Acquisitions: Auction versus Negotiation

The world of M&A breaks down into two large camps: negotiated sales and auctions. Although they’re similar, auctions and negotiated sales have a few key differences.

  • An auction is a business sale process where a group of Buyers makes their final and best bids and the company goes to the best bid. So what does best bid mean? In most cases, the best bid is the highest price, although Sellers do examine other factors, including Buyer’s ability to close a deal, how much of the sale price is in cash, and when Seller will receive that cash.

    For example, say Seller is examining two bids. One bid has a total deal value of $10 million, with $1 million in cash at closing and $9 million in the form of a note (a promise to pay later). The other offer is for $5 million, all cash at closing.

    Which is the better deal? Perhaps the first bid ($10 million total value) makes the most sense; after all, it’s more money. But depending on the situation, the second bid, although lower, may make more sense; perhaps Seller is willing to forgo a higher potential price for the certainty of more cash today.

  • A negotiated sale occurs when Seller (or Seller’s advisor) talks with each Buyer and perhaps tailors the pitch to highlight those benefits that will be most appealing to each individual Buyer. A negotiated sale still has elements of an auction (numerous participants making bids), but a negotiated sale involves a lot more hand-holding of the Seller.

Which process is better depends on the situation. An auction usually works best for larger, well-known companies. In these cases, Buyer may be willing to pay a premium for a famous company.

A negotiated sale works best for smaller companies or companies with losses or thin profits.

Some Buyers shy away from auctions. Although an auction can be a great way to sell a company, the auction may result in an unintended consequence: no bids!

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