Company sales: Exclusive agreement versus auction
More and more frequently, we at Taylor Wessing see our clients foregoing a structured bidding process when selling a company. Mostly for good reason, because especially in the case of transactions involving medium-sized companies, the implementation of a structured bidding process with several parallel bidders must be examined very carefully; the effort and costs are often too high in relation to the overall process. Sometimes the market is extremely narrow for individual companies because of their high degree of specialization, so the number of bidders is very limited anyway.
Last but not least, sellers and potential buyers — at least after a certain point — simply want exclusive negotiations with the other party. From the seller’s point of view, exclusive negotiations have the advantage that if the process fails, confidential information is only disclosed to one bidder. This is an important point, especially for medium-sized companies. It is important to them that their intention to sell does not become known in the market and possibly harm the company in its day-to-day business. Most importantly, the buy side often has an interest in negotiating exclusively. On the one hand, the closing probability should be increased, on the other hand, no buyer wants to be overtaken on the right.
The parties should enter into an exclusivity agreement, whether as part of a letter of intent or in a separate agreement. The most important points that should be regulated here: The parties must agree on the duration of the exclusivity phase, a unilateral or bilateral arrangement of the exclusivity, and so-called break fees or cost-bearing rules in the event of a breach of exclusivity.
Both parties should attach great importance to making the exclusivity agreement as specific and as precise as possible. As soon as the issue of exclusivity has been bindingly clarified in addition to other “run-up” issues, the parties can focus with full vigor on the further steps towards concluding a successful deal.
Certainly no. Especially for medium and large transactions, it is important to know all the options in terms of potential buyers. If the seller commits to an investor too early, he and the company will miss out on valuable opportunities. Conversely, however, price is not always the decisive argument, as too high a price can inhibit the company’s development opportunities and indirectly damage the reputation of the previous owner. Thus, the seller must always ask himself which procedure is best suited for his transaction: the broader market approach through a structured bidding process or the fast and uncomplicated variant within the framework of an exclusive situation.