How to Maximize Business Sale Value Through an Auction Process

The sale of your business is likely the most significant financial event of your life. Whether you’re preparing for retirement, looking to unlock the value you’ve built, or planning your next venture, the stakes couldn’t be higher––and it’s crucial you do everything you can to maximize your outcome.

One of the most effective ways to ensure you achieve the best possible outcome is to sell your business through an auction process. This competitive approach brings multiple interested buyers to the table, driving up offers and allowing you to select the deal that best aligns with your goals.

But running an effective auction process demands delicate management. There’s no auctioneer standing on a podium with a hammer. Instead, there’s a lot of in-depth strategy, careful considerations, and intense negotiations. If you’re selling your business, you must have a trusted business broker guiding this process: one who’s experienced in managing auction processes for businesses like yours.

At Mercadien Capital Advisors, running auction processes for middle-market businesses is a key element of our work. In this guide, we’ll walk you through the critical steps of an auction process, focusing on how to partner with your business broker to engage buyers, foster competition, and close a successful transaction.

Preparing for the Sale

When you sell your business, you don’t jump right into an auction process. Instead, you undergo a months-long period of preparation in partnership with your business broker. Together, they’ll help you prepare your business for sale and start taking the initial steps toward bringing it to market.

During this time, you’ll take steps including:

• Identifying Your Goals: some business owners may just want the best possible financial outcome: others might want to sell to a buyer that will ensure their legacy lives on. Determining your goals is key to the strategy of selling the business.
  Business Assessment: conducting an objective analysis of your business helps you proactively address any issues that might hinder a transaction, such as inaccurate financial statements, contractual issues, and more. With these insights, you can take steps to enhance your business’s value before a sale .
  Preparing a Confidential Information Memorandum (CIM): this document is essential in the auction process, helping potential buyers of your business get a clear understanding of your business’s value.
  Assembling Your Deal Team: selling a business is a team sport. You’ll need to draft in professional advisors including business brokers, legal counsel, tax advisors, and other specialized professionals, depending on the nature of your business.

Once you have all of these pieces in place, you’ll be in a much stronger position to take your business to market. We wrote more about these steps in our guide to selling a middle-market business. Read it here: Selling a Middle-Market Business: The Mercadien Capital Advisors Guide.

Finding and Engaging Potential Buyers

A pool of interested buyers is a prerequisite for any auction process. Your business broker and advisors play a crucial role in identifying qualified prospects.

Using their knowledge of financial and strategic acquirers in your area, your advisors build out a target list of prospective buyers who may be interested in buying your business. Once that’s done, they’ll craft and send teaser letters designed to generate initial interest. These teaser letters are anonymous. They’re sent by the business broker, not you, and include a company overview, high-level financial information, some key selling points, and a proposed framework for the transaction.

Once the teaser letters have been sent, it’s a waiting game. Prospective buyers who are interested in learning more will reply to express their interest in exploring the opportunity. Then, they sign a nondisclosure agreement (NDA) before receiving your CIM. At this point, the goal is to have several prospective buyers reviewing your CIM with a view to making a bid.

Conducting the Auction Process

The auction process is the heart of maximizing the value of the transaction. It’s where competitive dynamics drive up offers and ensure you’re in the best possible position to achieve your financial and strategic goals. While every auction process functions slightly differently, here’s a closer look at the key phases and how to manage them effectively.

Soliciting Interested Buyers

Once the Confidential Information Memorandum (CIM) has been shared, prospective buyers will be asked to submit an Indication of Interest (IOI) if they are interested in buying the business. These non-binding documents outline the buyer’s proposed purchase price, deal structure, and key terms, but they’re only the starting point for the process.

As the owner of the business being sold, your aim is to receive multiple IOIs that you can evaluate. Assess how the offers align with your priorities, considering both the financial elements of the IOI as well as post-transaction considerations such as employee retention and earn-out periods.

At this stage, narrowing the field to a group of serious, capable buyers is crucial. Buyers should not only demonstrate their financial capability to fund the deal but also present a clear vision for the future of the business that aligns with the seller’s objectives. This filtering process avoids unnecessary delays and ensures that later stages focus on the most viable prospects.

Competitive Bidding & Negotiations

Once you’ve shortlisted potential buyers, the auction process enters the bidding and negotiation stage. Here, your aim is to foster a sense of urgency and competition among buyers, encouraging them to present their best possible offers.

Invite interested buyers for a meeting. Give them a tour of your business, have them present their vision to you, and grant them access to a data room that contains additional information on the performance of your business.

Once this process has been completed, sellers often invite buyers to submit revised offers that improve upon their initial IOIs. This step allows you to leverage multiple bids against each other, increasing the overall purchase price and obtaining more favorable terms. Depending on the IOIs you received, you may ask potential buyers to improve their offer in certain ways i.e. changes to proposed purchase terms, earn-out agreements, and more.

Maintaining both momentum and leverage is critical during this phase. Focus on keeping the process structured and professional, with clear communication about deadlines and expectations. 

Once a final candidate is chosen, the goal is to receive and negotiate/execute a final Letter of Intent (LOI) between the seller and the buyer.