The SME takeover market has become highly professionalized in recent decades, partly due to the entry of private equity as a large buyer group. As a result, the controlled auction has been a frequently used process within acquisition processes for some time.
Yet we regularly see buyers, especially within the SME sector, struggling with this procedure or deciding not to participate and thus not to take over a company.
Controlled auction
The controlled auction is a structured process, in which several potential buyers are simultaneously asked, on the basis of a process letter with specific principles and rules, to submit an acquisition proposal within a certain time frame on information that is equal for all.
A selling party thus creates a competitive playing field in a non-transparent market so that he can make a considered choice for the buyer best suited to him and is able to complete the sales process in the shortest possible time (less chance of noise in the market). Buyers tend quite often to interpret the process as being purely about the highest bidder and not wanting to be "played out" in such a process. As far as we are concerned in a professional process, an unwarranted conclusion.
Process-letter
First, the selling adviser must be able to make a good assessment of whether the underlying proposition lends itself to a controlled auction. A clear process letter is of great importance in order to start the auction process in a professional manner.
Besides a parameter such as purchase price, a seller wants to have insight into the intended structuring of the acquisition, who is the buyer, what is expected from the seller post-closing. For comparing proposals, it is important to be unambiguous about the starting points, including the moment of economic transfer and the corresponding balance sheet data.
Specific knowledge
Basically, the data requested are things for a buyer to consider anyway, so why not do it right up front. Of course, this requires a different process approach than first just probing to see if we can reach a deal, gathering a lot of information before the letter of intent stage and slowly tying a seller into the process.
On the other hand, it also provides clarity very early in the process! The risk that parties further in the process come to the conclusion that they have arrived at pricing on different principles or discussion about the substance of the acquisition during contract formation is minimized.
However, the process requires specific knowledge of the M&A process, and it is important as a buyer to determine whether this knowledge is represented in your deal team. Practice shows that without this specific knowledge, the success rate for a buyer decreases significantly, often due to misunderstanding and not being able to properly assess what specifically is being asked. Professional parties know how the game is played and are able to anticipate correctly.
Our advice: on the selling side you should consider whether the proposition is suitable for a controlled auction. On the buy side, do not shy away from it, make sure you have professional M&A knowledge in your deal team!
