How does an auction process work?

While every seller and deal are unique, here’s the basic template for a limited auction.

01 Prepare.

Position your company to achieve maximum value in a sale by planning ahead. Optimize your marketing, sales, production, people, space, and key industry metrics so that you put your best foot forward for buyers.

02 Engage.

Select an investment banker that understands your goals, exit channels, ideal transaction structure, plans post-closing plans, and timeline. Add other appropriate professionals to your deal team, including M&A legal counsel, accountants and tax advisors, and personal financial advisors. We’re happy to assist you in fielding a great team matched to your intended transaction.

03 Market study.

Once engaged, Sierra Pacific Partners typically conducts a market study using proprietary databases to assess the company’s value, determine active buyers in the industry, and talk to those buyers to uncover how they view and weigh various value drivers.

04 Sell-side diligence.

In conjunction with the market study, you’ll supply us with detailed information about the business, including financial statements, tax returns, and operational details, among other things. We also encourage all sellers to retain a financial due diligence firm (“FDD”) to perform inside financial due diligence, including a quality of earnings (“QoE”) report. Your buyer will conduct their own QoE, so having a baseline report that you can share with buyers later in the process is helpful and will inform our view as to valuation.

05 Marketing materials.

We use our inside diligence to prepare marketing materials to position the company, tell its story, and address issues up front where appropriate. These materials include a one-page summary masking your business’s identity (a “no-name teaser” or “teaser”), as well as a detailed confidential information memorandum (a “CIM”) that, when appropriate, is accompanied by a financial supplement with pro forma and historical financials and pre-arranged (“stapled”) financing.

06 Stapled financing.

If appropriate, we help secure a pre-arranged financing package for potential buyers. A staple can make a transaction more attractive to potential purchasers, who are also free to source their own financing.

07 Buyer list.

Using the information gleaned from the market study, as well as additional research and client input, we develop a buyer list of potential purchasers that we invite to participate in the auction. The buyer list includes targets that are strategic buyers (ie, industry participants and competitors), financial buyers (ie, private equity firms and family offices), and hybrids (strategics owned by private equity firms). The buyer list is supplemented and refined throughout the process.

08 Teaser distribution.

Using proprietary contact-information databases, we reach out to the appropriate contacts at buyers by phone, email, and online platforms to generate interest using the teaser. The goal of the teaser is to pique a potential buyer’s interest. Interested parties are asked to sign a non-disclosure agreement (NDA) to continue.

09 CIM distribution.

Once NDAs are signed, the detailed CIM is distributed to interested buyers. The CIM provides a comprehensive overview of the business, including financial performance, market position, and growth prospects. As mentioned, the CIM will also often include a financial supplement and stapled financing.

10 Indicative offers.

If overall interest from buyers in a transaction is high, your banker will utilize a two-stage bid process, beginning with a deadline for submitting indications of interest (IOIs). IOIs outline proposed deal structure; valuation methodology (for example, 5-6x EBITDA), assumptions (for example, a normalized level of working capital), and range (for example, $15M - $18M); and any other key assumptions or conditions.

If there is less interest or a limited number of bidders, your banker may instead utilize a single-stage process, skipping straight to the letter-of-intent (LOI) phase described below.

11 Boil down.

The IOIs and bidders are analyzed and compared. The most promising potential purchasers are invited to continue in the process.

12 Management meetings and due diligence.

Short-listed buyers are invited to meet your management team, either virtually or in-person, and conduct in-depth due diligence. This stage allows buyers to better understand the business and refine their offers.

13 Letters of intent.

The bid-process instructions provided to buyers by your banker will set a deadline for them to submit letters of intent (LOIs). The LOIs will be much more specific in nature than the IOIs in terms of transaction structure, purchase price, financing structure, closing conditions, and, often, key legal elements of the transaction.

14 Selection and negotiation.

The seller, advised by its bankers and legal and other advisors, reviews the final bids and selects the preferred bidder. Negotiations then take place to finalize the terms of the transaction.

15 Signing and closing.

Once terms are agreed upon, the purchase and other definitive transaction documents are signed. There may be a gap between signing and closing (a “deferred closing”) in order to obtain shareholder and regulatory approvals, transfer key contracts, or satisfy other closing conditions.

The transaction is completed when the conditions are met, wire transfers are sent and received, and the deal is legally closed.

After closing, there may be post-closing adjustments based on working capital or other agreed-upon metrics. The buyer also begins the process of integrating the acquired company into its operations.

16 Congratulations!