Bidding Process

Bidding Process: Competition for the Acquisition of a Company

The bidding process is a structured procedure designed to bring multiple interested parties into competition for the acquisition of a company during its sale. The goal is to achieve the best possible sale price and the most favorable terms for the seller through the competitive dynamic among bidders. Compared to exclusive negotiations with only one interested party, a professionally managed bidding process increases the chances of a successful transaction on attractive terms.

Procedure of a Bidding Process

A typical bidding process consists of several consecutive phases, which the seller carefully plans and manages together with their M&A advisor:

1. Preparation: Initially, the sales documents are prepared, especially the Information Memorandum (IM) containing the essential data about the company. In parallel, a list of potential buyers (Long List) is researched and selected based on strategic fit, financial capacity, and transaction experience.

2. Contacting Interested Parties: The prospects on the Long List are confidentially contacted and, after signing a Non-Disclosure Agreement (NDA), provided with the IM. Often, the IM also includes procedural rules and an indicative timeline for the further process.

3. Indicative Offers: Based on the information in the IM, interested bidders submit a first, non-binding valuation in the form of an indicative offer. This includes, besides a rough purchase price range, key points regarding the transaction structure, warranties, and conditions. The seller selects the most attractive offers and invites those bidders to the next round.

4. Due Diligence: The remaining interested parties gain access to a data room containing detailed documents on the legal, financial, tax, and operational situation of the company. They may conduct management presentations and site visits and refine their valuation models. Often, initial drafts of the transaction documentation are exchanged at this stage as well.

5. Binding Offers: Based on the due diligence findings, bidders submit final, binding offers. These include a concrete purchase price, the essential contractual components, as well as any closing conditions and warranty requirements. The seller conducts final negotiations with the best bidders and decides on the most attractive offer.

6. Signing and Closing: The final transaction documentation is negotiated and signed (Signing) with the preferred bidder. Once the closing conditions are met and the required approvals obtained, the company shares are transferred and the purchase price paid (Closing).

A professionally managed bidding process typically lasts between three and six months. However, especially in complex transactions or with a large number of interested parties, significantly longer periods may be necessary.

Advantages of the Bidding Process

For the seller, a structured bidding process offers numerous advantages over exclusive negotiations with only one interested party:

• Competition and Price Maximization: The competitive element encourages bidders to increase their price expectations to outbid competitors. Studies show that bidding processes often achieve significantly higher sale prices than exclusive negotiations.

• Negotiating Power and Better Terms: With multiple interested parties, the seller has a stronger negotiating position, not only regarding price but also contractual clauses, warranties, or liability issues. The risk of a negotiation deadlock or last-minute failure is lower than with a single bidder.

• Confidentiality and Process Efficiency: Bidding processes are typically conducted under strict confidentiality. Clear procedural rules, standardized documents, and streamlined communication through the M&A advisor allow information requests and negotiations to be efficiently channeled. This conserves management resources and protects against the leakage of sensitive information.

• Flexibility and Backup Options: Even if the preferred bidder withdraws at the last minute, the seller still has other interested parties in reserve. Dual strategies, such as preparing an IPO in parallel with the sales process, are also easier to implement.

• Market Validation and Argument Support: The competition in the bidding process provides the seller with objective feedback on the attractiveness and market price of their company. This can facilitate internal decision-making and support arguments with shareholders and stakeholders.

However, a bidding process is not always the best choice for every company sale. For very small transactions, the effort may be disproportionate; in complex carve-out situations or restructuring cases, a competitive process may deter some bidders. Owners who have a specific preferred buyer in mind often consciously forgo this approach.

Success Factors in the Bidding Process

To ensure that a bidding process delivers the desired results while running smoothly and efficiently, several key success factors must be observed:

• Thorough Preparation: Careful preparation of the IM and data room is essential to provide bidders with a sound basis for valuation and an efficient process. A meaningful Long List of potential buyers and a clear timeline should also be established before the process begins.

• Confidentiality and Equal Treatment: Strict confidentiality is paramount to protect the company from harm and avoid jeopardizing the process. At the same time, all bidders must be treated fairly and equally, with identical access to information and uniform deadlines.

• Competitive Intensity and Bidder Pressure: The more interested parties involved, the greater the competitive pressure and the potential for a high sale price. A too small bidder pool or early dropout of bidders endangers the process dynamics.

• Realistic Price Expectations: The seller should align their price expectations with a realistic market assessment. Excessive minimum prices deter potential bidders. At the same time, the M&A advisor should filter out "lowball" offers in advance to ensure the seriousness and quality of the bidder pool.

• Pace and Clear Milestones: A tight schedule with clearly defined milestones for offers, decisions, and contract negotiations maintains pressure on bidders and prevents the loss of process momentum. This is especially important in self-managed sales, where delays are common.

• Professionalism and Experience: Conducting a bidding process requires significant transaction-specific expertise and experience, from process design and negotiation to contract drafting. In most cases, engaging a specialized M&A advisor who professionally orchestrates the process and relieves the owner is recommended.

• Flexibility and Pragmatism: Despite all standardization, a bidding process must allow for flexibility, for example, when unforeseen events occur or individual bidders have special needs. A pragmatic, solution-oriented approach helps avoid endangering the process.

Handling bidders also requires skill: a balanced approach combining appreciation, discretion, and decisiveness is needed to keep interested parties engaged while safeguarding the seller’s own interests.

A bidding process is undoubtedly one of the most effective and efficient ways to successfully execute a company sale and achieve the best possible price. Due to its complexity, confidentiality, and high demands on experience and process management, involving a professional M&A advisor is almost always advisable. The costs are usually more than offset by the improved terms achieved.

As demanding as a structured bidding process may be, it is well worth the effort. With proper preparation, a competitively intense process design, and experienced transaction support, it can be a powerful tool for sellers to best realize their strategies in the company sale.