Many mergers & acquisitions professionals use a controlled auction process or timed process to sell manufacturing companies. In this article, we’ll discuss whether or not this is the best option.
The Psychology of The Controlled Auction Process
As a mergers & acquisitions intermediary who spent the early part of my career as a machine tool auctioneer, I understand the value of an auction. Auctions create a demand for immediate action. The auction process, whether for the sale of machine tools or a complete ongoing business, can accelerate the timing of completion. Auctions work because they create the belief among potential buyers that unless they act immediately, they’ll lose an incredible opportunity. Competition has the potential of driving prices up. However, an auction or timed process only works if the best candidates are participating.
Auctions Only Work with Participation From The Best Potential Buyers
A logical question when considering if a controlled auction process is right for the sale of your manufacturing company is:
- Who will be participating in the auction process?
- Does the process eliminate any quality buyers?
In an auction or controlled sale process, the M&A professional is tasked with alerting the most appropriate buyers of the availability of their client company. But how do they determine that?
They basically look at 3 categories to develop their list:
- First, they look at strategic buyers, either in your industry or a complimentary sector that are of appropriate size that they could make the acquisition.
- Second, they look for private equities, both those that have experience in your sector, and one’s for whom the target company may fit their purely financial criteria.
- Third, the M&A professional will go to their own network of registered buyers and past business buyers.
All of the above is a good and logical approach to the sale of a manufacturing company. However, is this approach leaving out a major category of buyer, who in some instances could be a better buyer than the above two categories?
In addition to the above categories, there is statistically another category of buyer who is acquiring lower middle-market manufacturing companies in record numbers. In many instances, these buyers are spending more on manufacturing companies than their strategic or private equity competitors.
Who’s in This Category and Why You Shouldn’t Ignore Them
This group of buyers is leaving the employ of others to acquire their way into entrepreneurship and they’re buying an incredible number of lower middle-market businesses throughout the United States. Perhaps they’ve worked for a large manufacturing company, but now they want to build their own company. Here’s why this group should not be ignored:
- They usually want to keep the company in its current location. This is good for Sellers who also own the real estate and need the sale of it to help fund retirement. It also ensures that the jobs stay in the community.
- Generally, individuals are more respectful of the Seller’s legacy. They have no interest in folding the acquired company into a larger operation. They want to maintain and build upon the foundation laid by prior ownership.
- These buyers come with a wealth of experience, which usually includes sales, marketing and business development. This skill set is most often missing from founder-led companies with retiring owners. Acquisition lenders recognize the fact that these buyers can typically increase sales without substantial time or effort. This makes them easily financeable.
- Unlike large strategics who may not need your facility or your equipment, the individual needs and wants the entire operation. Strategic buyers sometimes have larger facilities and better equipment, so they don’t want and are not willing to pay for what they don’t need from you.
Are Any Other Types of Buyers Excluded From The Controlled Auction Process?
In recent years my firm was tasked with the sale of a medical instrument company. We built our list and the best companies in the sector worldwide were invited into the process. We hit our target, as the response was large. However, we quickly learned that some of the largest publicly-traded companies in the sector were opting out because they simply refuse to deal with a timed process. In this case, it was a real shame because some of the BEST self-excluded.
The Stigma Attached to A Company When the Auction Process Doesn’t Produce A Buyer
In a timed process, anybody who’s anyone in a particular sector knows the company is on the market. In other words, that means all your larger competitors. What happens if the company doesn’t sell during the process? In addition to the damage that might develop from competitors, suppliers or staff learning that the company is on the market, the company may now have a stigma that inhibits the sale. Quality buyers may wonder what was wrong with the company that caused the process to be unsuccessful? For an eye-opening understanding of this and other problems with the controlled auction process, simply Google “M&A Auction Failure.” This search returns 367,000 results in .44 seconds. Horror stories abound.
Clearly the controlled auction process works sometimes, otherwise, M&A firms wouldn’t use it. But is it right for every company? Here are some things you should consider:
- Does the size of the company being sold matter? YES! Smaller companies generally do not sell through a controlled process.
- Does the controlled auction process guarantee the sale of the business? NO!
- Does the controlled auction process eliminate quality buyers from the process? YES!
- Does a one size fits all marketing approach work for everyone? NO! Every manufacturing company is unique and deserves a custom approach.
Again, the controlled auction method can work and does work for many companies of appropriate size, but it’s not right for everyone. If you’re considering the sale of your manufacturing company, find out about ALL your options before making an informed decision.
Contact us with any questions.