If you’ve been to an auction, you know it can be exciting.
When it’s an item you’re interested in, your competitive juices start flowing, and your bids do too. Before you know it, you’ve blown past the $1000 limit you set before the bidding started. It’s as if nothing else matters. You’ve got to get that item. You’ve got to have the winning bid.
If you do win, you’re excited. If not, you are sorely disappointed. Either way, you’ve forgotten all about the real winner— the person who owned the item.
When it comes to selling your company, you can be the real winner. In fact, you can win through an auction process that is similar to those you might have experienced, except that it’s a silent auction.
Experienced investment bankers know how to tap the potential of an auction-style sale to boost your company’s price and secure better terms. They know how to get prospective buyers excited by the opportunity of acquiring your business.
When the auction begins, the buyer knows right away that there are other buyers at the table. Typically, he or she doesn’t like to see others bidding on your company. But their interest confirms their belief that your company is a real opportunity. Now, the dynamics of the sale shift. The buyer’s mindset shifts from “opportunity for gain” to “fear of loss.” This drives buyers to raise their bids. The buyers are convinced that the opportunity for gain is real. Yet it’s the fear of loss that drives them to increase their bids to try to keep your company out of competitors’ hands.
Five factors are at work during an auction. Together, I like to call them the auction effect.
- Competition – In today’s business world, nobody likes to lose. When there are multiple buyers, they feel the competition. The seller has other offers to consider. The price goes up! That’s how auctions work in your favor.
- Enhanced Buyer Perception – The true value of a company is not always determined by the assets of the company or by its performance. The true value is in the mind of the buyer. Just look at the Internet-based businesses that have attracted billions of dollars from buyers even though they have yet to make a profit. The buyers see the potential for profits. They see value that others don’t. Now add the dynamic of an auction. When you multiply the number of buyers, the perceived value is enhanced. Each suitor sees the company in a different light, yet must compete with others to win. And that causes the perceived value to increase.
- Time pressure – There are no time constraints on a buyer when a company is being sold without an auction. No deadlines, no pressure. A single buyer feels no pressure to increase his or her offer or to negotiate. An auction is different. Bidders know they are competing for your company, and if they want to win, they have to present timely offers. They don’t know when you might agree to another offer, and that makes them much more likely to bid promptly and bid higher.
- External Validation – Often buyers need to know that others see the potential value of your company before they will make a serious offer. An auction provides ongoing external validation that your company is attractive and that the offers are realistic and are based on the market.
- Fear of Loss – Potential buyers have a vested interest in the company they want to purchase. They have done their homework. They have determined that this is the best company of its type for sale at this time. Otherwise, they would simply wait and buy another firm. Not only does an auction help to enhance company value, it also provides the seller with more negotiating power. The seller can work with potential buyers to craft the perfect offer that more closely meets their financial and personal goals. During an auction, buyers may fear that if they lose the auction, they may not get another chance to purchase a company like yours. This fear drives buyers to increase their offers or negotiate better terms.
For all these reasons, an auction-style sale can ensure that you get the best deal when the gavel drops. At Allegiance Capital, we want you to know what you’re getting into when you sell your business. We view educating prospective clients as one of the most important things we do.
We like to begin our process by offering a free book called Street-Smart Moves for Selling Your Business by Joe Aberger. It’s brief, well-written, and addresses 29 topics that are critical to selling a business like yours. Be sure to Sign Up Now.
And, in the meantime, if you have questions, feel free to call me at 214.217.7732.
About the Author
David J. Mahmood
Founder & Chairman
Phone: (214) 217-7732