Auctioning a business – buyer’s concerns

In a previous article the writer had articulated some of the advantages pertaining to the auction process. However, these benefits can only be enjoyed by the seller. A prospective buyer faces a number of drawbacks in regard to the said process.

Firstly, the buyer could be compelled to purchase the target for a higher price than it may have done if it was involved in a private treaty sale. Moreover, as it is engaged in a bidding war with other suitors, a prospective buyer’s chances of success are markedly curtailed and there is also an appreciable risk of squandering management time and professional fees. Furthermore, a private treaty sale will generally provide the buyer with greater contractual protection than an auction sale and it is likely to acquire more pertinent information about the target as well. In addition, the auction process will reduce the buyer’s ability to establish imperative relationships with the target’s management prior to the sale. Lastly, news about the sale could spread when the auction is initiated and this can potentially increase the risk of damage to the business.

A bidder should therefore try and become the preferred buyer and enter into a lock-out agreement with the seller. This is a tactical move which can be beneficial to the purchasing entity. However, the eventual outcome will be shaped by the parties’ negotiating skills and bargaining power.

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