Feb 1, 2021
In this episode, Gina Cocking and Jeff Guylay discuss the
different types of auction processes we use in a sale transaction,
including a negotiated deal, a small process, a targeted auction,
and a broad auction.
Gina and Jeff talk about each approach's pros and cons and why
Colonnade advises clients on selecting one versus the other,
recognizing that each situation is unique and calls for a
customized approach to the market.
This episode concludes with a case study of a negotiated process, a
broad auction, and a hybrid between a small and targeted
auction.
In this episode, Colonnade Advisors addresses the following
questions as related to the different types of auction
processes:
What are the four primary types of auction processes that Colonnade
ues when helping clients sell their business? (01:52)
Gina: "There are four general categories, ranging from the smallest
audience to the largest. A negotiated deal involves one bidder. A
small auction process generally involves two to five bidders. A
targeted auction involves the most likely universe of buyers,
ranging from six to 20. Lastly, a broad auction involves contacting
a large universe of potential buyers, over 20 parties. There are
pros and cons to each of these types of auctions."
What are the advantages of a broad auction? (03:42)
Jeff: "Broad auction is all about market discovery. All four types
of auctions involve competition and market discovery, but a broad
auction involves unturning every stone, looking under every nook
and cranny, and finding that needle in a haystack that you wouldn't
have thought about otherwise."
How do we get to the highest value and best outcome with a
negotiated auction? (05:14)
Gina: "With a negotiated auction, there is one buyer, so there is
the risk of no competition. The buyer could decide to change the
price or walk away at any time. One tactic that we use is creating
a credible threat. As the seller's advisor, we work in the
background on creating materials to go to broader auction, if
necessary. That is the credible threat: if the deal has a misstep
at any point, the buyer knows that we can immediately go to market
and get full market discovery."
Jeff: "Some sellers do not want to go through a broad auction, so they are willing to get a slightly lower price for the benefit of only dealing with one buyer. In addition to pricing, deal momentum and getting a deal done are also critical. "
What are the benefits of running a small process? (08:01)
Gina: "A small process has a lot of the same dynamics as a
negotiated auction. One additional advantage with a small process
is actual competition, so you can compare bids and push bids up to
the highest possible bid of that group. A second advantage is that
the seller will have a fallback buyer if the first choice drops out
for some reason. Another advantage to a small process is
confidentiality. Selling a company is a very revealing exercise
because the seller has to tell buyers everything about the company.
A negotiated deal and small process limit the risk of who is
getting the seller's confidential information."
What types of buyers are generally in a small process and
targeted auction? (10:46)
Gina: "In a small process, it tends to be strategics. When there is
a smaller universe of potential buyers, it tends to be the ones who
really understand the business and are already interested, which
are likely to be strategics.
Jeff: "A small process is almost always largely comprised of strategics. There is probably a mix of strategics in a targeted auction, maybe have half a dozen strategics and ten private equity firms. That sort of universe can generate meaningful competition."
What are the trade-offs between a small process and a targeted
auction? (11:27)
Jeff: "The workload for a small process and a targeted auction is
probably the same, but the seller does lose a little bit of a grip
on confidentiality because they are talking to 20 parties instead
of two."
What is one of the drawbacks of starting with a small group of
buyers? (12:17)
Jeff: "One of the drawbacks of starting with a small group of
buyers in a negotiated deal, small process, or the targeted auction
is that it is sometimes challenging, depending on how far along you
are in the process, to switch to a broader auction. Sellers have to
carefully select the appropriate process upfront."
What are the considerations for doing a broad auction?
(14:04)
Gina: "The most important reason to do a broad auction is full
market price discovery.”
What is Colonnade's approach to assessing the buyer universe?
(14:30)
Gina: "Colonnade focuses on specific industries in business
services and financial services and the intersection between those
two, so we know the private equity universe and strategic buyers in
these industries."
Does a broad auction require more work for the seller?
(15:30)
Jeff: "A broad auction does not mean that our clients have to do
more work than in a targeted auction. All the materials that we put
together are the same. We still have to go through rigorous due
diligence, putting the book together, building the financial model,
and making sure that the story ties out."
What is Colonnade's typical broad auction process? (16:00)
Jeff: "We create a curated list of buyers, which is approved by our
seller clients, and we approach this broad group with a no-name
teaser. We contact this broad group and find out the conversations
they are having internally and determine whether there is a fit.
Sometimes the most obvious top five names are not interested, so it
is good that we went to a broader universe. Our team goes through
the list on a no-name basis, then under a non-disclosure agreement
with specifics. We work the funnel down through indications of
interest, management meetings, final bids, and down to the
winner."
Is there confidentiality risk in a broad auction when reaching
out to 100 or more potential buyers? (17:25)
Gina: "The 100 or more potential buyers do not all get the
information. In the funnel, the 100 or more get the teaser and NDA
on a no-names basis. Then at the next stage in the funnel, after
the execution of an NDA, some subset will get the confidential
information memorandum, which has a lot of information, but it
still is limited. The next subset gives us an indication of
interest letter, and we will invite them into the next stage, in
which they then have access to a limited data room and perhaps a
management meeting. Only that final buyer in exclusivity has access
to what can be considered the company's trade secrets and have
access to the contracts, etc."
Jeff: "The buyer list is highly curated. "
Can you give an example of a negotiated process? (19:02)
Jeff: "TD Bank was selling a national commercial finance business
to Wells Fargo. TD Bank hired Colonnade after they started talking
about price. Colonnade's role was negotiating the deal and giving
TD confidence that they were getting a fair price and what
valuation should be in a broader process—creating a credible
threat. We worked diligently to negotiate the deal with Wells Fargo
and put a book together so that we were ready to go to market if
needed. We had the 40 logical names ready to be contacted at any
minute if the deal with Wells Fargo failed, and Wells Fargo knew it
too. To Well Fargo's credit, they came through and offered a fair
price and came through on the timing and offered a great platform
for the team."
Can you give an example of a broad auction? (20:54)
Gina: "Last year, Colonnade advised Smart AutoCare on its sale to
Fortegra, a Tiptree subsidiary. We started with over 100 potential
buyers in a broad auction. We received eleven indications of
interest, so it was a very robust auction, and we had great price
discovery. At the time, we did not go to Tiptree because Fortegra
was a supplier to the company. We had three or four LOIs, and we
went forward with the winning bidder, and it was a great price. We
ended up pivoting away from that buyer because the business owner
felt that the private equity firm did not understand his business,
so we went to Tiptree. We were able to negotiate a transaction with
Tiptree and successfully close. It was a fantastic result."
Can you give an example of a hybrid between a small process and
a targeted auction? (22:37)
Jeff: "A few years ago, we advised ADG on its sale to APCO. APCO
had approached ADG and its private equity owner and made an offer.
ADG hired Colonnade to run a small process or a targeted auction to
the obvious buyers. There were many potential buyers, but we
narrowed it to a list of 15 and worked that list to generate
competition and drive up the price and terms. APCO, who had
essentially triggered the auction, was ultimately the winner, and
they paid market price and terms. It was a great outcome for the
team."
How do sellers determine which auction process is the best
option for selling their businesses? (24:16)
Jeff: "Each situation is unique, and it depends on lots of
different circumstances. It is all part of the pre-planning process
that we work with our clients to think about what's going to get
the best outcome based on their objectives."
Host Information
Gina Cocking
Gina Cocking serves as the Chief Executive Officer of Colonnade
Advisors. She returned to Colonnade as a Managing Director in 2014.
Gina began her career in investment banking at Kidder Peabody, was
an analyst at Madison Dearborn Partners, and an associate at J.P.
Morgan & Co. She was a Vice President at Colonnade Advisors from
1999 to 2003. She left Colonnade to gain operating experience as
the Chief Financial Officer of Cobalt Finance, a specialty finance
company. She went on to become the Chief Financial Officer of
Healthcare Laundry Systems, a private equity-backed company for
which she oversaw the successful sale to a strategic acquirer. Gina
served as the Line of Business CFO – Consumer Banking and Lending
at Discover Financial Services. Gina serves on the Board of
Directors of CIB Marine Bancshares, Inc., a bank holding company
based in Brookfield, Wisconsin, that operates banking offices in
Illinois, Indiana, and Wisconsin. Gina received her BA in Economics
and an MBA from the University of Chicago. Additionally, Gina holds
the Series 24, 28, 79, and 99 securities licenses.
Jeff Guylay
Jeff Guylay is a Managing Director of Colonnade Advisors. Prior to
joining Colonnade in 2000, Jeff was an investment banker at J.P.
Morgan in the firm's Mergers & Acquisitions and Fixed Income
Capital Markets groups in New York. He also spent several years in
J.P. Morgan's Chicago office. Jeff has over 20 years of M&A and
investment banking experience and has served as lead execution
partner on over 25 M&A and financing transactions at Colonnade.
Jeff received an MBA from Northwestern University's Kellogg
Graduate School of Management and a Master of Engineering
Management from the University's McCormick School of Engineering.
Jeff received a BA from Dartmouth College and a BE from Dartmouth's
Thayer School of Engineering. Jeff holds the Series 7, 24, 63, and
79 securities licenses. Jeff serves as a director of the non-profit
Nurture, an organization dedicated to enhancing the nutrition and
wellness of children and families.
About the Middle Market Mergers & Acquisitions Podcast
Get the insiders' take on mergers and acquisitions. M&A
investment bankers Gina Cocking and Jeff Guylay of Colonnade
Advisors discuss the technical aspects of and tactics used in
middle market deals. This podcast offers actionable advice and
strategies for selling your company and is aimed at owners of
middle market companies in the financial services and business
services sectors. Middle market companies are generally valued
between $20 million and $500 million.