Is the Highest Bidder the Best Buyer?

When selling a company, most business owners imagine they will have an auction and simply select the highest bidder. Pretty straightforward. And why not? They’ve worked hard, sacrificed and borne enormous risk for a large portion of their life. It’s time to harvest the fruits of their labor. Pick the highest bidder and move on, right? Not necessarily.

There are a couple of considerations, especially in this highly anxious market, which can create problems for the highest bidder in an auction process.

First, if it’s important to you that your company is carried forward managed in a style similar to what you had established, the highest bidder might be hesitant to sign on the dotted line. Each guideline you want them to follow amounts to extra cost for the buyer. This creates an inverse relationship between your success in getting an attractive price in the auction and the buyer’s willingness or ability to honor your requests.

Secondly, the higher the auction goes, the more difficult it will be for the buyer’s to finance the deal. Banks will only lend so much on the assets and cash flow, and the equity underpinning the deal requires a proper return for the risk incurred. In most cases, the buyer has equity sources lined up beforehand and they’re signing off on the buyer’s bids in real time. Unfortunately, in many cases the winner assumed they could raise the capital, but in the end they just couldn’t finance it. There simply wasn’t enough ROI to attract the equity. And if it’s a long drawn out auction, the winning bidder may have become so emotionally invested that they’ve simply rationalized themselves into believing their numbers, but no arms-length equity provider would approve it.

Third, some auctions are so “successful” that the winner is almost feels strained by his new venture even before he closes the deal. Auctions can be brutal on buyers, and the “winner” gets beaten up pretty badly in the process of outdistancing himself from the competition.

Why would a seller care? For two reasons. First, as stated above, you may want your company carried forward in a certain fashion, with key members of your team provided for, and continued employment for yourself, etc. Second, you may not have gotten an all-cash sale and might carry a note for a portion of the purchase price. Due to your “success” with the auction the buyer might be so tightly wound and have so little margin for error that the new venture becomes almost adversarial from the start. There will be goals to meet (a higher price requires higher performance) and because there’s so little room to miss targets, a toxic environment could easily develop and spoil all the fun for everybody.

Be careful what you ask for. Highest is not always best.