Roughly half of the country's small business owners will head into retirement in the next few years, which means that thousands of businesses will soon be up for sale. And while they're still fairly uncommon in Canada, auctions can often yield the best price and terms for the seller. Here's an overview of how the process works:
What's an auction? When it comes to selling a business, an auction doesn't mean that with the strike of an auctioneer's gavel the assets are sold to the highest bidder. It refers to a private or controlled auction, a process which identifies multiple parties interested in buying a business. The idea behind the auction is to create competitive tension among potential buyers to obtain the best price and terms for the seller.
What type of business is best suited for auction? An auction is best suited to businesses that have a unique market position or are significant in size in terms of revenue or profitability. For example, does your business have a unique product, contract or process? Have you secured key contracts with clients, suppliers, etc.? Does the company have a well-recognized brand name in the marketplace? Also, consider whether you require an element of discretion in order to sell your business as opposed to publically listing it for sale.
The auction scenario is ideal for certain types of businesses, however some careful consideration is required to determine if this is the best way to sell your business.
Understand what a business is worth. The first step is to get a valuation done to understand what the company is potentially worth. A chartered business valuator (CBV) is specialized in valuing a business and can help establish a base value. The aim of the auction process would be to achieve at least that base value or more, depending on the interest from the marketplace. In determining the value of a business, a CBV will consider various factors, including but not limited to items such as market position, profitability, sustainability of the business, and management, etc. He or she may also offer insights on pricing strategy, planning and negotiation to achieve the highest sale price possible.
Who conducts the auction? A mergers and acquisitions (M&A) adviser specializes in managing this type of process facilitates the auction. You'll want to work with an M&A advisor with specific expertise in your type of business, either by industry or size, or ideally both.
How does the process work? The auction process is quite intensive; there's a lot of planning and analysis conducted by advisers, initially and throughout the process.
For example, your M&A adviser will prepare a Confidential Information Memorandum (CIM) that outlines the company's past, present and future outlook. The CIM is a marketing document offered by the seller to help prospective buyers determine if the company is worth pursuing.
Your M&A advise will also develop a list of potential buyers; this could include competitors, private equity firms and other individual parties. Your adviser will then market the business to these parties on a confidential basis at first, but eventually after receiving appropriate legal documentation, the name of the company will be disclosed along with the CIM.
Throughout the process, the M&A adviser will field questions, provide updated information and discuss the opportunity one-on-one with the prospective buyers. The aim of this process is to funnel multiple parties towards a deadline date with an offer.
What are the drawbacks? Usually the auction process is more costly compared to traditional channels of selling your business, but with the right company and a well-run auction, the seller could reap significant rewards. The rewards could be anything from a higher sale price to significantly better terms of the deal (i.e. transition period, continuity of operations, etc.). In the right situation, an auction would be worthwhile as it could more than offset the additional related costs.
Apart from the cost, there's no guarantee of a sale. Depending on the agreement with your adviseor, there will likely be some upfront costs. So there will be a significant cash outlay whether or not your business is sold.
Finally, it's not for everyone. Depending on the business, an auction might not be suitable as the company may need more market exposure; for example, listing the business with a commercial business broker or marketing the business for sale through the newspaper or online through various websites.
What are the advantages? An auction can boost the sale price and secure better terms. Potential buyers are motivated by a good opportunity. As the auction gets underway, a potential buyer will be aware there are other buyers at the table, which works to not only confirm the value of the company but validates the opportunity for buyers. This dynamic should result in higher bids; especially if the opportunity is well defined by the M&A adviser in marketing the auction.
Along with the possibility of yielding a higher price, auctions are generally more confidential. Putting your business up for sale means advertising it. The business community will learn about the impending sale, including your customers and vendors. In a controlled business auction, there are a limited number of buyers invited to bid and the deal is more confidential.
However you decide to sell your business, you'll want to get the highest price possible and an auction could be the best way to achieve that. Consulting the right team of advisers – specifically corporate lawyers, M&A experts, and a chartered business valuator – is an important part of the process.
Hussein Poonjani is a managing director in the corporate finance practice at Grant Thornton for Northern Alberta. He is a chartered accountant and chartered business valuator and focuses on valuation of businesses and provides transactional support to his clients who are in the process of buying or selling a business.