Canada: Multiple Bids: How To Sell Your Business Like Yahoo!

A lot of businesses are sold every year but it's not often that a blockbuster deal happens. Yahoo, however, has received a lot of media attention by running an auction process to sell their business.

According to an April article by Bloomberg, the auction process attracted bids from over 10 companies ranging as high as $8 Billion – some of the largest names in technology and private equity were cited as interested. So what does the sale of Yahoo have to do with private business owners considering the sale of their business?

For some business owners, the word auction may have a negative connotation, but for the right company under the right situation, this process could maximize value.

When I say auction, I don't mean taking the company's assets to an auctioneer. What I am referring to is a controlled auction where an investment banker or intermediary creates competitive tension among a group of buyers in order to maximize the price and facilitate a transaction on behalf of a seller of a company. Using a controlled auction to sell your business can potentially result in a better price or more favorable terms.

So if you are a business owner, you're probably saying, sign me up. How do I attract several buyers who are willing to outbid each other to buy my business?

Not so fast, as there are some drawbacks you have to consider:

  • Significant upfront cost: conducting an auction process can be costly, even if you don't sell. The process typically has an upfront cost that is paid regardless of whether a transaction occurs.
  • Limited parties: A controlled auction exposes the company for sale to a limited group of parties at the discretion of the seller but some businesses require broader exposure to sell. For example, if you are a business where any potential buyer would need to be active within the business once you sell it, you may need to be exposed to a broader range of buyers in order to generate interest.
  • No guarantee of a sale: Even though you are incurring costs to have someone market your business, and may have multiple parties interested, there is no guarantee that this will result in a sale.

On the other hand, if the auction is well run, the benefits can outweigh the drawbacks. In particular, some benefits could include:

  • Significant premium: While this might not always be the case, an auction creates competitive tensions among bidders thereby increasing the possibility of a bidder paying more than their peer(s) because they view this as an opportunity they cannot afford to lose. A good investment banker or intermediary would be well versed in positioning this once-in-a-lifetime opportunity to add a sense of urgency for potential buyers and compel them to pay a higher price than other bidders for strategic reasons.
  • Better terms – Auctions, because of the competitive nature of bidding, could also lead to better terms in the deal which might be more appealing to a seller than the highest price. For example, let's assume you have two companies bidding. Company A is offering $10M but the owner will not be able to transition out of the business for five years. Company B is offering $8M but the owner can transition out of the business within a year. In this situation, the owner may find the offer from Company B to be more appealing.
  • Limited parties: Although this can be a drawback, it can also be a benefit. Often business owners are concerned about too many parties knowing that they are for sale. In an auction, it's true that you could be approaching competitors, suppliers or customers, but ultimately, the business owner controls who initially views the opportunity, after a nondisclosure agreement is signed. In the case of YAHOO, given the company's profile, this process was widely reported in the media. However, for private companies, the auction process could give the right balance of confidentiality and exposure to get a sale completed.

Like many others, I am quite interested to see who the eventual buyer of Yahoo will be. Having been through a few of these auction scenarios myself, I know that, irrespective of whether a deal goes through or not, there is a lot of hard work that goes into the process and there are many ups and downs. Whatever happens, the outcome of this deal is sure to be one to remember.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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