Avoid An Auction – A Different Point Of View

An article by Bassem Mansour, of Resilience Capital Partners in the US, arguing that negotiated deals ie. where there’s no auction process to drive up the price, have an undeserved bad rep. He argues that they do not necessarily result in a lower price and that there are numerous advantages to the negotiated deal over the auction.

He does not touch on a managed process where a broker or adviser creates competitive tension among buyers to drive offers up, his comparison is purely between auction vs negotiated. And he makes these points in favour of negotiated deals:

• That they are quicker to close
• They are more flexible and therefore more suited to distressed companies
• That price isn’t negatively affected as buyers have an incentive to pay a higher price to avoid having other parties competing with them
• That the process is less disruptive.

If negotiated deals make so much sense, then why are they comparatively rare? Put simply, excessive seller expectations. Owners of companies frequently have an outsized view of their value. Proprietary buyers are usually the first in the door, and they are the ones who deliver the news about a company’s value. If the price is too low, the owner may pursue an auction. Often enough, they realize that the original offer was close to the mark, especially when all risks and costs are factored into the price.