Selling a Family Business
Once the owner decides that selling the business to other family members is not feasible, he or she should try to maximize the sale price for the business to unrelated third party buyers. These third party buyers can be categorized as either financial buyers or strategic buyers. A financial buyer is typically a private equity fund motivated solely by financial considerations in acquiring the business and may or may not be engaged in the business through portfolio companies. In contrast, a strategic buyer is looking for synergies between the owner’s business and the buyer’s existing business.
Many family business owners tend to negotiate with only one potential buyer who happens to approach them, in many cases on an unsolicited basis. These owners tend not to widely market their businesses. They may be flattered that they have received an unsolicited offer for their businesses and, as a result, fail to search for other potential buyers. Negotiating with only one potential buyer severely limits the negotiating power of the owner. Because of this decreased bargaining power, negotiations are unlikely to result in the best price and the best terms.
It is generally agreed that an auction produces the highest price for a family business. Generally, the owner needs two or more bidders to conduct an auction. However, an auction can be conducted with only one bidder if it is a closed auction (i.e., no one knows who else is bidding).
To induce potential buyers to bid at an auction of the family business, the owner must assure them that the business will be in fact sold to the highest bidder and that the auction will be conducted fairly.
If the owner has not really decided whether or not to sell, the auction will not be held effectively. Likewise, if the owner favors one bidder over another and wants to give that favored bidder the last bid, it is unlikely that the owner will be able to induce other potential buyers to participate in the auction.
The most suitable businesses for an auction are those with good financial results and a strategic market position. If neither of these characteristics is present, the auction may not be as successful, but should still be considered if there are competing buyers.
The auction must be conducted by a person in whom bidders have confidence and pursuant to written rules and procedures that are uniformly applied to all bidders. The owner’s investment banker or attorney can fulfill this role.
Bidders are generally turned off by open auctions (i.e., auctions where their bids are publicly disclosed) and by auctions with innumerable rounds of bidding.
Auctions can also be classified as “controlled” and “uncontrolled” auctions. In a controlled auction, the company initiates contact only with selected buyers, whereas in an uncontrolled auction (also sometimes called an “open auction”), there is no limit on the number of potential bidders. Uncontrolled auctions potentially attract the largest number of buyers, but may be highly disruptive to the company and its employees. Many companies prefer a controlled auction because it is less disruptive.
To induce bidders to participate in the owner’s auction, bids should be submitted in writing and maintained in confidence. Cutoff dates for bids should be advertised and adhered to.
It is preferable from the seller’s point of view to have at least two rounds of bidding, with the second round confined to the highest two bidders. If there are more than four bidders, the owner may wish to conduct a third round of bidding.
It is essential that the owner provide all bidders with the same agreement of sale form, which will be prepared by the owner’s counsel. Each bidder should be requested to state any changes in the agreement of sale form when submitting a bid. In determining who the highest bidder is, the legal terms must be considered along with the price.
To make the bids meaningful, the agreement of sale should provide for a forfeitable deposit on signing and eliminate any due diligence out. Otherwise, the high bidder could use the auction as a vehicle to postpone making a final purchasing decision to the prejudice of the seller, who has lost the other bidders.
The agreement of sale form should contemplate a quick closing after the signing. If the sale to the high bidder does not close quickly, the other bidders will have lost interest by the time the seller realizes the sale to the high bidder will not be consummated.