Targeted Auction

What is a Targeted Auction?

A targeted auction, also referred to as a controlled auction, is a type of auction that involves a small group of qualified buyers that compete for the acquisition of a company. The number of buyers is typically limited to about three (3) to ten (10), and only includes buyers that fit criteria set by the seller.

Ideally, the list of buyers excludes many financial buyers such as private equity groups. The seller tends to focus on qualified strategic buyers, which allows the process to move quickly. Limiting the number of buyers also reduces the risk of confidential information getting leaked to third parties.

During the auction process for mid-market companies, sellers prefer using the targeted auction method to increase their chances of selling the company within a short time. The company’s promoters work with experienced advisors to prepare a prospective list of buyers who are interested in completing the transaction.

The prospective buyers may be industry leaders or buyers that have transacted successfully with the seller in the past. The list is then reviewed and pared down to only a few qualified buyers who have met the seller’s requirements. The seller then conducts a bidding process among the targeted buyers to determine the highest bidder.

How a Targeted Auction Works

The first step in a targeted auction process is to identify all prospective buyers that have the potential to complete the transaction. The seller then works with experienced M&A advisors to prepare a memorandum that gives a detailed overview of the business operations.

The memorandum is then presented to the prospective buyers, inviting them to place bids for the purchase of the business. Upon receipt of the bids, the list is refined to a list of buyers with the highest bids, fewest closing conditions, and the financial capability to complete the transaction.

The final list of prospective buyers usually includes less than ten interested parties. The potential buyers are then invited for a meeting with the seller and the seller’s advisors, with the goal of discussing the transaction to raise the bids or close the deal sooner. During the meeting, the buyers are provided with a draft purchase agreement that details the terms and conditions of the deal, and the buyers are required to provide their final bid for the transaction within a short period.

The draft purchase agreements are then returned to the seller, who then chooses the buyer that meets the terms of the transaction and provides the best offer. The buyer gets an exclusivity period during which the required approvals are received and financing confirmed. Both parties then meet and finalize the transaction in a timely manner, once the buyer has conducted due diligence and confirmed that all the information provided by the seller is accurate.

Elements of a Successful Targeted Auction

1. Financial capability

Due to the high stakes involved in the transaction, the buyer must have the financial capability of completing the transaction without any issues. If the buyer does not have enough capital to finance the transaction, they should be in a position to obtain financing from financial institutions.

2. Available business information

The seller must provide comprehensive information about the business to prospective buyers before inviting bids. The prospective buyers must also be allowed reasonable time to analyze the information. Providing buyers with the relevant information makes them well informed of the business operations, which gives them an opportunity to decide whether or not they will proceed with the transaction. If satisfied with the information, the prospective buyers send their bids to the seller.

3. Presence of more than one qualified strategic buyer

A successful targeted auction should have several qualified buyers who have expressed interest in acquiring the business. Having two or more buyers in the final buyer’s list increases the competitiveness of the auction, and the seller stands a better chance of getting a higher valuation for the business.

Advantages of a Targeted Auction

The following are some of the reasons why most sellers prefer the targeted auction method over other auction methods:

1. Higher business valuation

A targeted auction allows several qualified strategic buyers to compete for the business, and this is an advantage to the seller. Each prospective buyer places a bid with the knowledge that there are other buyers interested in acquiring the same business. It raises the business valuation as each buyer competes to outdo each other with the goal of taking ownership of the business.

2. Seller is in control

In an auction with a few handpicked buyers, the seller is in control of the process and has the ability to determine the potential buyers that get into the final list of bidders, the expected purchase price, and the overall winner that gets to take ownership of the business. The buyers must also comply with the seller’s terms and conditions to proceed to subsequent stages of the auction process.

3. Ideal for mid-market companies

The targeted auction is ideal for mid-market companies that have established systems and structures. The list of prospective buyers for such companies comprises buyers with the financial muscle to close the transaction.

More Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Financial Intermediary
• Investment Teaser
• Key Players in the Capital Markets
• Vickrey Auction
• See all economics resources