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Type of processes

There are two types of sales processes, being an exclusive process or a so-called auction process.

Exclusive process

An exclusive process is when a Buyer and Seller are negotiating on an exclusive basis. In the exclusivity period the Seller will not engage in negotiations with another potential Buyer. This is the case when a Company is acquired by one of its employees (Management buy-out).

While exclusivity is favorable for a Buyer, a Seller more often is better off when there are multiple potential Buyers bidding against each other.

An exclusive process is recommended when only one potential Buyer is interested in your business. This can be the case if you were approached with the question if you want to sell your business or if you actively searched yourself. This option also is preferred in case of a Management Buy Out (MBO), where your existing management team wants to acquire the Company from you.

Before committing to an exclusive process be sure to know if there is no other interest in your business by other potential Buyers. If this is the case it is better to structure the process as an auction to keep upward pressure on the purchase price because of multiple bidders.

When engaging in an exclusive process you need to commit that in the exclusivity period you will not start any negotiations with a new potential Buyer. As you are committed to one party only, consider asking compensation for that exclusivity. This compensation is called an earnest payment. An earnest payment is a security deposit made by the Buyer to demonstrate that they are serious and willing to demonstrate an earnest of good faith about wanting to complete the transaction. If the deal is successful the deposit is netted against the final purchase price. If the offer is rejected, the deposit is usually returned, but all depends on what has been negotiated.

When starting an exclusive process consider asking for a compensation for the exclusivity offered, such as an earnest payment.

Auction process

When there is no exclusivity for only one potential Buyer the process is structured as an auction process. No, this is not to be compared with a public auction such as Christie’s, where all is online and public. Rather some selected Buyers have the opportunity to bid on your Company, after signing and agreeing on a non-disclosure agreement. It is ultimately your choice who will be the ultimate Buyer. This could be someone who is not offering the highest price.

In most cases a broker manages the auction process on behalf of the Seller. In an auction process the timeline and rules are more strict. If you share information with one Buyer you will need to share the same information with all other Buyers as well.

For an auction process you need to prepare sufficient sell side documentation, such as a Teaser, a Confidential Information Memorandum and a virtual data room. While the preparation takes more time, the actual sales process is faster as there is a strict deadline when all Buyers need to submit their final binding offer. The timeline in an exclusive process is limited to the exclusivity period, but in practice this is often extended multiple times due to invested time by both Buyer and Seller.

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