When is a business auction the best route?
Auctions usually suggest hushed rooms ruled by the rap of the auctioneer's gavel. The business auction is very different, with offers delivered in private and adjusted through successive bidding rounds. The aim, of course, is still to get the highest price for the seller, but how do you know when the auction option is best?
Unlike ordinary sales, the business auction runs to a tight timetable with interested parties whittled down through two or three rounds of bidding. The assumption is that holding an auction will ratchet up the value. 'You always put the business up for auction because if you don't, you don't get the best price,' says Douglas Llambias, chief executive and lead negotiator for deal broker The Business Exchange.
But this assumption is disputed. 'An auction will produce the best initial offer, but it may not produce the best final price,' says David Brooks, head of corporate finance at Grant Thornton. 'Many institutions will put in a bid, knock others out of the way, and then do as much due diligence as they are allowed in the period of exclusivity,' agrees Andrew Sherratt, head of corporate finance at Dibb, Lupton, Alsop. 'They can chisel away at the price. Vendors have to be astute in managing the process if they are to get what they anticipate in terms of price and with few warranties and indemnities.'
Auctions have clear downsides. 'There is a significant cost for vendors in running the process,' says Sherratt. 'And they may have to set up a data room and allow bidders to crawl all over the company, so exposing confidential information earlier than they would otherwise.' But the process may still be chosen for political reasons. 'It's a way directors can show they did scour the countryside for the best bid,' says Brooks. Plcs selling off non-core subsidiaries can use auctions to suggest they have attempted to maximise shareholder value. 'But that's still unproven,' he stresses. 'A selective approach can elicit a bidder who will pay top dollar because he has a clear run.'
Auctions have disadvantages for bidders too. 'From the buyer's point of view, it's a pain having these tight deadlines,' says Stephen Bourne, corporate finance partner with accountants BDO Stoy Hayward. Companies up for auction have to be obviously highly attractive business propositions. The business must also be large enough to make the transaction worthwhile for all concerned, Bourne suggests. The Business Exchange handles deals for companies valued at £1million upwards and points out the potential variability of the outcome. 'The value of the business can vary by a multiple of ten times from one buyer to the other,' Llambias says. 'It depends how the business fits into the buyer's master plan.'
Auctions have increased significantly over the last five years, with Scottish Amicable a high-profile example. They are now estimated to account for perhaps 50% of small-to medium-sized corporate sell-offs. But still many buyers will not play ball. 'If there is an auction, many buyers will walk away because of the risks involved,' says John Fleming, managing director of Chesham Amalgamations and Investments. 'You have to consider if your best buyer will participate. It's a balance.'.