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Controlled Auctions: The What, Why & How Of Auctioning Your Business

By November 5, 2020February 4th, 2021No Comments

As business owners across the country brace for the second spike of COVID cases ahead of winter, many are also re-assessing their retirement plans.

 

In 2016, a study by Babson College shows that a majority of small business owners are over the age of 50, which means that many business owners are facing a decision of whether to sell now or to weather the next 5 to 10 year economic cycle?

 

Informal Controlled Auctions are rapidly becoming a more common occurrence nationwide, and this week ROI sits down with our Broker/Intermediary Sandy Kiriakidis to discuss the topic.

 

What is a controlled auction in terms of business brokerage?

A Controlled Auction is a structured process, in which multiple qualified buyers are engaged simultaneously to competitively bid on a company for sale. This process ultimately facilitates the sale of the target at the highest price and best possible terms. Basically, the list of possible buyers is constructed and approved by the seller, prior to going to market.

The seller’s company is also referred to as the ‘acquisition target.’ Buyers are often strategic/corporate, or financial/private equity groups. No asking price is published. Beauty–or in this case, value–is in the eyes of the beholder.

Confidentiality of the seller’s identity is maintained in the marketing and outreach process, until buyers have signed a non-disclosure agreement (NDA) and been prescreened.

What are some advantages of a controlled auction?

The greatest advantage is speeding up the sale process and getting the best possible price and terms at a given moment. We often get an offer with price and terms better than we had anticipated!  This process can work across all industries, but is particularly effective in the fields of manufacturing, services and distribution. If a buyer really wants to acquire the seller’s assets, they may offer value far greater than ‘fair market value.’

A knowledgeable business brokerage firm will essentially create a highly competitive market for the seller/acquisition target, which greatly leverages the seller’s negotiating power. Engaging multiple buyers in a controlled auction sparks competition which incentivizes buyers to win—by acting quickly and offering their best possible price and terms.

 Take East Branch Trucking for example…This was the case when the broker believed this company was worth more to an industry buyer than the numbers they were producing. The result in the owners own words: “ROI received three offers for my company and their process netted more than any of my advisors had indicated the value would be!”

What are some disadvantages?

Although in many cases a controlled auction may maximize the probability of a successful sale, it does not guarantee the sale of a business.

The main disadvantage is that the best price and terms we can obtain at the time of the auction, may not be the best price and terms that are attainable at some point in the future. Of course, the future is unknown.  We tailor our process to align with the seller’s [realistic] financial and personal goals, but this may not always be possible. The market will produce the highest price, but the Seller may still decide not to sell at that price.

For this reason, a controlled auction may not be the best option for sellers who are not motivated to sell or have a ’grass is always greener’ mindset. ‘Better’ may always be possible, but they must have a realistic picture of good and fair price and terms and be open to accepting them.

There are instances where place and time simply don’t align in finding the right buyer. For example, the buyer may be very interested and a good overall fit but does not have the resources to invest in acquiring a new company and merging it with their own company. Some companies may not be able to adhere to the timeline (particularly if they are highly bureaucratic) but are otherwise qualified.

What role does a great business broker play in the controlled auction setting?

We determine, on a case by case basis, if a controlled auction is an appropriate method for an individual seller. A good business intermediary professional will be able to determine when it is a good time to let the market decide what the business is worth. ROI has seen controlled auctions yield offers ranging in the three to four million range, and then a standout offer of ten million for the same business.

A skilled brokerage firm should have experience in controlled auctions for companies across a range of industries, including medical equipment, HVAC, manufacturing, services, technology, distribution etc.

ROI Corporation Brokers the Sale of Murphy HVAC

The broker/intermediary is vital: they create the market, reach out to buyers with an effective ‘teaser’, create a compelling and accurate Confidential Memorandum. They run and closely manage the controlled auction process and keep buyers on a timeline: from getting buyers all necessary information to make an offer, to negotiating price and terms, helping with financing, and ultimately ensuring success of the auction process.

As in the case of a conventional sale, producing a high quality Confidential Memorandum (aka ‘CBM’, ‘CIM’, DEAL BOOK or ‘IM’) for buyers is key in conveying all qualitative and financial information a buyer requires to bid.

Why is it important to have an experienced business broker on your side?

Making sure your broker/intermediary is reputable and professional– as you are trusting them with your greatest asset– is paramount. Of course, experience makes the broker/intermediary more familiar with the buyer’s psychology and how to effectively engage the buyers at every step of the process, which in turn improves the probability of success in conducting a controlled auction.

The first steps are to conduct a business valuation, this will provide you with an opinion of value and will determine your next steps. ROI takes this initial step to the next level through the Value Maker Program. This is a proprietary process that benchmarks the value of your business now, and identifies the 5-15 key points for improvement that you can focus on with your CPA or business advisor so that when you’re ready to sell, your business is worth much more to potential buyers than it is today. If you are asking yourself “How do I sell my business in NH, MA or elsewhere in the next 1-5 years?”, don’t hesitate to contact us today!

ABOUT ROI

ROI Corporation, based in the Boston market, has been involved in the sale of businesses and real estate in over 30 states since 1997. They also assist in the transfer of business ownership between generations and to key employees and management teams. ROI serves all of New England including MA, NH, RI, ME and CT with two divisions: a main street division serving smaller businesses as well as their middle market M&A division. Their Marietta, Georgia office, specializing in Service Distribution & Manufacturing Companies, serves the southeast United States. For more information, please visit us on the web at www.roimergers.com or call (781) 682-6209.