Going Once, Going Twice

Due diligence schedules may be compressed, but due diligence expenses certainly aren’t. If anything, due diligence expenses are up, because potential buyers employ more people for more hours to try to shoehorn proper due diligence into the limited time they’re allowed. “It is possible for the buyer to spend hundreds of thousands of dollars,” Garon says, on pre-deal services of lawyers, accountants, and industry experts. All those expenses can occur before buyers are even reasonably sure that they will win an auction.

Even buyers who do win an auction may still be in line for financial disappointment. “In order to get the deal they want, a buyer may be forced to overpay. If they do overpay, they run the risk of having a failed acquisition down the line,” Knopf says. “The more pressure an auction puts on price, the more risk for buyers that they will end up with a failed or so-so transaction, where they don’t get the rate of return they’re looking for.”

The Good News for Buyers

Though auctions heavily favor company sellers, they also bring sellers some liabilities—and offer buyers a few advantages.

A lack of privacy is one potential problem for sellers. Instead of revealing company data to just one suitor, an auction seller must share proprietary information with a large number of possible buyers. That list may include competitors who could benefit from company data even if they don’t ultimately buy the firm. “One of the things that owners need to be careful about is that, in large-scale auctions, lots of people get to know about your company and obtain confidential information about your company,” Griffith says. “Some of those people are just on a fishing expedition. They’re curious about your company.”

Even sincere buyers can use information about a company in ways that make sellers uncomfortable. “Do you want the world knowing who your customers are, how profitable you are, and whether you have a looming lawsuit?” Griffith asks.

An auction can also scare away some potential buyers. “A lot of buyers hate auctions,” says Steve Quinlivan, a partner at Minneapolis-based law firm Leonard Street and Deinard, PA. Some refuse to participate, a group that often includes strategic buyers, who sometimes assume that private equity groups will outbid them. As a result, an auction can put off the very buyers who might be a company’s best possible fit.

“I think the auction process, viewed from the perspective of the strategic buyer, is a negative,” agrees Tim Scallen, a partner at Minneapolis-based law firm Oppenheimer Wolff & Donnelly, LLP. “Strategic buyers are reluctant to enter auctions because they think they’ll end up with unreasonable price or deal terms. They’re in the business, not of doing transactions, but of adding strategic results for their company. Some will choose not to participate unless they’re very interested. The seller may miss some really good fits because some wonderful strategic buyers may say, ‘Look, we’re just not going  to participate.’”