Auction Process
An auction process is the structured way a company is sold to the best of several bidders: a teaser, an information memorandum under confidentiality, indicative offers, a shortlist into the data room, binding offers, and a final negotiation with one or two. The seller's adviser runs it to a timetable the bidders do not control, so that buyers compete on price and terms at the same moment.
- Also known as
- Controlled auction, Competitive sale process, Sell-side process
- Used at
- sales of companies large enough to attract several buyers and to bear an adviser's fee — in fintech, from a few million of EBITDA upwards; below that, bilateral sales are the norm
- Binding
- the process letter is not; the confidentiality agreement is; binding offers are, and the sale agreement that follows
- Typical timetable
- four to six months from launch to signing — two to three weeks for indicative offers, six to eight for the second round, four to six for the final negotiation
- Typical funnel
- 40–80 parties contacted, 15–25 sign the NDA, 5–8 indicative offers, 2–4 in the second round, 1–2 binding offers
- Parties
- the seller and its board, the sell-side adviser (an investment bank or M&A boutique), the bidders and their advisers, and management, who present the business and are also, often, the buyers' future colleagues
How an auction process works in practice
The adviser prepares the materials — a one-page anonymous teaser, an information memorandum, a financial model, a sell-side quality of earnings report if the seller has commissioned one — and a buyer list of strategic and financial bidders. Phase one: the teaser goes out, interested parties sign the NDA and receive the memorandum, and are asked for indicative offers by a date. Phase two: the strongest three or four get the data room, management presentations, site visits and a draft sale agreement, and are asked for binding offers with a marked-up agreement. Phase three: the seller picks one — sometimes two, kept in parallel to the end — and negotiates to signing, often granting exclusivity only in the last weeks.
The design choices are the adviser's craft. A wide auction maximises price but leaks; a narrow one keeps confidentiality but may leave money on the table. Strategic bidders pay for synergies but need more approvals; funds move faster but pay for the business alone. The draft agreement issued in phase two lets the seller compare bids on terms as well as price, and sets the starting point in the seller's favour.
For a fintech the process letter should ask each bidder how it will handle the regulatory approval and the third-party consents, because a bid that ignores them is a bid that will not close on the timetable.
Example
An adviser runs a process for a payments company with €6m of EBITDA. Teasers go to 52 parties; 19 sign the NDA; 6 submit indicative offers, from €38m to €62m. Four enter the second round with the data room and management sessions; three submit binding offers with marked-up agreements — €55m from a European group, €52m from a fund with a management incentive plan, and €57m from a US processor whose mark-up deletes the warranty cap and adds a financing condition. The seller negotiates with the first two in parallel, signs with the European group at €56m with a 20% warranty cap and regulatory approval as the only condition, and closes five months later. The US bid's higher number was worth less than its terms cost.
Common mistakes
- Launching before the materials and the numbers are ready, so the first thing bidders find is an inconsistency. - A buyer list built from who the adviser knows rather than who would pay the most. - Granting exclusivity too early, which ends the auction while calling it one. - Comparing bids on price alone when the agreement mark-ups are the real price. - Management so consumed by the process that the last two quarters' numbers fall, and the price with them.