Auction Sales of Private Companies:  The Bidding Process

PUBLISHED: 24th April 2023

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If you are selling a company, then an auction sale might be an option for you to consider.

An auction can encourage competition between interested bidders and has the potential to yield a maximum sale value for the seller. Also, the seller can maintain control over the sale process by setting the terms and conditions for the sale. However, the process should be carefully managed to ensure a successful outcome.

1. First steps of an auction sale

The first step for the seller in an auction process is to consider the appointment of corporate finance advisors who will prepare an Information Memorandum, also known as an IM.  This document is an overview of the target company and provides bidders with important information, such as the target company’s history, financials, market position and competitive advantage.  Details of the management team and the target company’s assets and liabilities are also included.

The corporate finance advisors will help to identify potentially interested bidders; distribute the IM to them, subject to a non-disclosure agreement (NDA); assess the level of interest in the target company and provide guidance on valuations.

Interested bidders will be invited to submit an indicative offer, outlining their proposed purchase price and any conditions attached to their offer.  The corporate finance advisors can liaise with bidders to collect more information and evaluate each bidder’s ability to finance and complete a transaction and any conditions attached to its offer.

Once indicative offers have been received, the seller and its advisors select which interested bidders proceed to the next stage.

2. Preparing the target company for sale

At the start of the process there are several actions a seller should take to maximise the value of the target company and prepare for the sale process.

Seek Tax Advice on the Sale Structure

Tax advice should be sought at the outset to determine the appropriate structure for the sale.  For example, tax advice may dictate whether there should be a sale of shares in the target company, or a sale of the business and assets by the target company.  In addition, any tax liabilities of the seller and the target company arising from the sale will need to be considered so these can be appropriately accounted for.


Ensure that the target company’s documentation is up to date. 

Bidders will want to see copies of recent accounting and tax records, the target company’s statutory books and registers, and, if relevant, property title documents, material customer and supplier contracts, employment and pension documentation, intellectual property assignments to the target company, licences and permits, etc.  Any issues identified should be rectified in advance, if possible, otherwise a bidder may form an unduly negative opinion of the business.

Review Existing Arrangements

It may be an opportune time to document unwritten contracts in writing or renew key agreements, in order to add value to the target company.  Potential issues that might decrease the value of the target company for a bidder should be identified and addressed insofar as possible, such as ownership of intellectual property, the condition of assets, threatened or pending litigation and insurance coverage.

Choose Your Internal Deal Team and Keep it Confidential

The sale process will require a lot of time from management.  The due diligence process is a particularly time-consuming exercise.  At the same time, the target company’s business still has to be managed to maintain normal operations.  Establishing an internal deal team who are informed of the sale process on a confidential basis so that they can assist as necessary is a sensible approach. 

Confidentiality is important as any rumours of a sale among staff, customers, suppliers and the market may have an immediate negative impact on the target company’s business and its valuation.

Set Your Own Goals

Decide what you want to get from the sale. 

Regarding purchase price, the goal might be a minimum price or an all-cash deal where a large proportion or the full amount is paid up-front.  Finding a bidder that brings synergies for the target company, has a plan for growing the business, and can retain all existing employees may be important.  A seller might also wish to ensure the continuation of existing commercial arrangements between the seller and the target company (for example, supply arrangements, leasing real property, etc.). 

Identifying goals will help to determine whether a bidder can meet expectations and should proceed to the next stage of the bidding process.

Engage a Legal Advisor

A corporate law firm with experience in the sale of companies can advise a seller on its rights, obligations and any liabilities that might arise upon the sale of the target company. 

  • It can assist with the sales process, help to prepare the target company for sale, and advise on any pre-sale restructuring of the target company that may be required. 
  • It should have experience negotiating similar sales and therefore can assist the seller by negotiating on the seller’s behalf and by identifying solutions to issues that might arise. 
  • It can assist with drafting, negotiating, and advising on the various transaction documents and ancillary documents, as well as assisting with legal due diligence queries, if required, completion arrangements and managing the legal process overall.

3. Facilitating an auction with multiple bidders

Data Room

The next stage involves giving the selected potential bidders access to an online data room containing detailed information and all relevant documents relating to the business of the target company.  These bidders use this information to conduct due diligence on the target company and prepare and submit their binding offer for the target company by a fixed deadline.

The advisors can assist with providing, populating and managing online data room facilities, establishing Q&A processes for bidders to raise queries, and organising management presentations, meetings, and site visits.  They will also liaise with bidders to outline the process and expectations, highlight the key goals of the seller, establishing clear lines of communication, and ensure deadlines are met.

Vendor Due Diligence

A seller may wish to consider preparing with its advisors its own vendor financial and/or legal due diligence reports, to be made available to bidders at this stage.  Such reports can help to streamline due diligence with multiple bidders by identifying any known issues together with the seller’s proposed solution.  A vendor’s financial due diligence report can leverage the earlier work done on the preparation of the IM and provide the evidence backing up financial figures set out in the IM.  Bidders will be seeking to verify figures in the IM during due diligence as these figures formed the basis for their indicative offer.

Transaction Documents

During this stage, bidders can be provided with drafts of the main transaction documents prepared by the seller’s legal advisors.  The documents will outline the main terms of the sale that the seller is prepared to agree to and will help to guide bidders as to the seller’s expectations.  Bidders will be asked to review the legal documents and submit revised drafts of these documents in a form they are prepared to sign, together with their binding offer.  This is intended to reduce the level of negotiations and allows the seller to better compare the terms and conditions of multiple bids.  It will also give insight into the negotiating approach of each bidder and an idea of what may be required to successfully complete a sale with a particular bidder, if they are chosen as the preferred bidder.

Warranties and Disclosures

The seller will be required to provide warranties to the preferred bidder in relation to the target company and its business as part of the share or asset purchase agreement.  The seller can limit its liability for these warranties by providing specific disclosures against particular warranties in a disclosure letter, where exceptions apply. 

A seller may wish to consider preparing specific disclosures at this stage against the draft warranties and provide these to the bidders together with the draft main transaction documents.  Preparing specific disclosures can be one of the most time intensive exercises required of the seller as part of the sale process.  However, if time permits, providing specific disclosures at this stage can streamline bidders’ due diligence by identifying known issues.  This can also reduce the extent of the seller’s disclosure exercise required at the next stage.  The seller’s legal advisors will be able to assist the seller with this exercise.

4. Choosing a preferred bidder and completing a sale

Once binding offers are received from the bidders, the corporate finance advisors and legal advisors will help the seller to review each of the bids received and select a preferred bidder who made the most attractive offer.  Typically, a seller will then enter a period of exclusivity with the preferred bidder.

The seller’s legal advisors will lead negotiations of the terms of the sale with the preferred bidder and its legal advisors.  It is possible that additional bespoke documentation will need to be drafted and negotiated, such as transitional service agreements, new employment agreements for senior personnel, new leasing agreements for real property, etc.  There may also be issues that have come to light from due diligence that need to be addressed, such as a requirement for pre-completion written consents or authorisations from third parties, or potential claims that the parties need to agree how to address.

Once the warranties in the share or asset purchase agreement are close to an agreed form, the seller, with the assistance of the seller’s legal advisors, will need to either commence preparing its specific disclosures against these warranties or, where specific disclosures were included in a draft disclosure letter provided to bidders with the draft transaction documents, update its specific disclosures.

In an auction sale process, completion tends to occur relatively quickly after a preferred bidder is chosen.

An option to consider

Selling a company is time consuming and can often be unfamiliar territory for an owner.  Fortunately, there is a proven path to success and experienced professionals available who can guide the seller along the way.  So, if you are selling your company you should discuss with your advisors whether to proceed by way of an auction sale.

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