Designing an appropriate sale process for your business is one of the most important decisions you will face as a business owner. Although there are many ways to sell a business, three of the most common methods are a broad auction, a targeted auction and a negotiated sale. The method you choose can have a significant impact on the outcome of your sale, including how much negotiation leverage you will have throughout the process, the purchase price and deal terms you are able to achieve, the likelihood that the deal will close, and the reputation of your business among your employees and the public. With so much on the line, it is important to ensure that you and your advisors design a sale process that sets you and your business up for a successful transaction.

Identify Potential Buyers

Developing a list of potential buyers is an important first step in determining the right sale process for your business.

Using your personal knowledge of the industry and the contacts you've cultivated during your career, you may be able to identify buyers who are interested in your company for strategic reasons (for example, your competitors) and financial reasons (for example, private equity firms). Publicly available or subscription-based online databases, trade magazines and associations, industry conferences, and SEC filings may also be helpful in finding potential buyers. If you are working with a business broker or investment bank, they will often take the lead in developing a comprehensive buyers list leveraging their own industry knowledge, contacts and deal experience.

Once you have created a list of potential buyers, you and your advisors may find it helpful to rank each buyer using specific criteria in order to further organize your deal process.

For strategic buyers, criteria may include:

  • the size of the buyer's company,
  • overall cultural fit
  • potential synergies
  • the impact of the transaction on your employees
  • the buyer's overall financial health
  • the buyer's experience acquiring other companies

For financial buyers, you may choose to focus on:

  • the firm's overall size, industry expertise, investment strategy, reputation and track record
  • the firm's ability to obtain financing
  • the strength of the firm's team
  • how your business will fit into the firm's existing portfolio of operating companies

Determine Your Sale Objectives

Once you have developed an initial set of potential buyers, it is important to reflect on the personal and financial goals that you want to achieve with the sale of your business. Determining the best sale process for your business will depend upon a number of factors, including the relative importance you place on maximizing price, favorable deal terms and expediency, minimizing disruption, preserving confidentiality, and finding the "right" buyer for your business and its employees.

Canvass the Market via a Broad Auction

In a broad auction, you would typically work with an investment bank or business broker to organize a multistage sale process that involves marketing your business to a large number of potential buyers in an effort to obtain the best possible sale price and deal terms. The heightened competitive pressure created by a broad auction may motivate buyers to differentiate themselves from the pack by agreeing to an accelerated timeline, a less onerous diligence process, fewer internal approvals or a more favorable outcome for your employees. However, it is possible that some buyers may choose not to participate if they believe the chances of winning do not justify the time and resources they would need to devote to the process.

There are certain risks that sellers should be mindful of when selling their business via a broad auction. Inviting a large number of potential buyers into the sale process increases the risk that confidential information about your business and the transaction might leak to the public or your employees, which may lead to difficult questions, hamper morale or precipitate departures. Some competitors may participate in the auction primarily or solely in order to gain access to confidential information. If multiple bidders advance to the diligence stage of the transaction, the resources and work required of your management team may be disruptive to the business. Failure to close a deal could create a negative perception of your business among customers, competitors and other constituents.

If these possibilities concern you, you may want to consider a targeted auction. Structurally similar to a broad auction, a targeted auction typically involves a smaller number of potential buyers — perhaps no more than 10 to 25 names. Involving fewer buyers may reduce the risks associated with sharing confidential information and the effort required of your management team to manage the transaction, while still demonstrating to your constituents that the final deal you strike was the result of a well-planned market process.

Pursue a More Focused Process via a Negotiated Sale

A negotiated sale narrows the scope of the process even further. Typically, you would initiate preliminary conversations with several potential buyers and provide them with a high-level overview of your business in order to gauge their level of interest in a transaction. At some point during these initial discussions you may choose to proceed further with one of the parties by exchanging additional information, agreeing on a non-binding term sheet, granting exclusivity, commencing due diligence and eventually entering into contract negotiations.

The negotiated sale process may proceed faster than a broad auction, as the buyer and seller are permitted more flexibility in determining (or modifying) the transaction timeline. If negotiations ultimately fall through, you may have another "bite at the apple" and choose to pursue other potential buyers or undertake an auction process.

However, choosing to engage with a smaller group of buyers gives you less negotiating leverage than you would have in a broad or targeted auction and minimizes the competitive tension among buyers that might otherwise lead to a higher sale price and/or more favorable deal terms. Without surveying a greater number of potential buyers, you risk leaving money on the table. This may make it more difficult for your board of directors to defend its decision-making process.

Questions to Consider

In weighing the advantages and disadvantages of each type of sale process, it is critical that you consider and discuss a number of important questions with your advisors, such as:

  • How important is achieving the highest sale price versus finding the best strategic fit for your business and its employees?
  • How soon do you need to sell your business? Do you have the benefit of time, or do personal and/or business considerations demand an accelerated timeline?
  • How confident are you in your management team's ability to coordinate a due diligence process with multiple potential buyers? How detrimental will this distraction be to day-to-day operations?
  • How comfortable are you with sharing confidential information about your business with a broad group of potential buyers?
  • What is the likelihood that family members or other constituents may question the decision to sell to the selected buyer?

Selling your business is a complex undertaking, and designing a sale process is just one of the many steps in a larger planning discussion that will help you and your advisors obtain the best outcome for your business and your family.

Related Advice for Transitioning Your Business:

The Most Important Questions Business Owners Should Ask Before They Sell

Simplifying Due Diligence With Thoughtful Planning

Ten Common Business Transaction Pitfalls

  • This white paper is the property of BNY Mellon and the information contained herein is confidential. This white paper, either in whole or in part, must not be reproduced or disclosed to others or used for purposes other than that for which it has been supplied without the prior written permission of BNY Mellon. This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. The Bank of New York Mellon, Hong Kong branch is an authorized institution within the meaning of the Banking Ordinance (Cap.155 of the Laws of Hong Kong) and a registered institution (CE No. AIG365) under the Securities and Futures Ordinance (Cap.571 of the Laws of Hong Kong) carrying on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities. The Bank of New York Mellon, DIFC Branch (the “Authorised Firm") is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: 225 Liberty Street, New York, NY 10286, USA. In the U.K. a number of the services associated with BNY Mellon Wealth Management's Family Office Services– International are provided through The Bank of New York Mellon, London Branch, 160 Queen Victoria Street, London, EC4V 4LA. The London Branch is registered in England and Wales with FC No. 005522 and #BR000818. Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA, which is registered in England No. 1118580 and is authorised and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd. This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. BNY Mellon Wealth Management, Advisory Services, Inc. is registered as a portfolio manager and exempt market dealer in each province of Canada, and is registered as an investment fund manager in Ontario, Quebec, and Newfoundland & Labrador. Its principal regulator is the Ontario Securities Commission and is subject to Canadian and provincial laws. BNY Mellon, National Association is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA") and the BMA does not accept responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. BNY Mellon is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA") and the BMA does not accept any responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2018 The Bank of New York Mellon Corporation. All rights reserved.