Until the onset of the credit-crunch, sellers of companies and businesses were able to sell for high prices on seller-friendly terms. The heady days of highly competitive auctions with cash-rich buyers lining up to buy assets at top prices and in short time frames is over, but the auction sale remains a valuable and successful structure for a seller wishing or needing to sell corporate assets.
A changing landscape
Over the last few years, auction sales have become firmly established as exit routes of preference for many sellers. In a market which saw a proliferation of prospective buyers and no liquidity problems, those transactions typically contained some seller-friendly features:
- The use of the “locked box” and the demise of completion accounts – sellers were able to avoid the cost and uncertainty associated with completion accounts as a mechanism for verifying price assumptions by so-called locked box structures. Under these structures, the transaction would be priced from accounts (often unaudited) at a date before signing which would become the effective economic date of the transaction. Risk in the trading performance of the target would pass at this date, the sellers agreeing not to extract value after that by dividends or other means. The ascendancy of locked box mechanisms greatly reduced protection to buyers.
- Short time frames – buyers were prepared (and required) to invest time and resources in processes with short and rigid time frames. Frequently, buyers were expected to close deals within days of being named as preferred bidder.
- Seller-friendly transaction documentation – auction sale documentation assumed a low level of warranty cover both in terms of the scope of the warranties offered and the short time limits, high financial thresholds and low caps to which warranty claims were made subject. The once conventional general tax indemnity was frequently not on offer.
Life after the credit crunch
The recent past has seen changes in the auction sale process. In our experience, despite the best intentions of sellers, it is becoming increasingly difficult to impose tight timetables. The absence of readily available acquisition debt finance and the return to ‘club’ deals has meant that the pace of many transactions has been dictated by banks rather than sellers. In some sectors, a worsening economic outlook has resulted in a more cautious and conservative approach to investment decisions and the passage of time has frequently led to some interesting price discussions. In short, the seller has (at least for the moment) lost the whip hand.
Keeping the initiative
Despite the hardening of the market, an appetite for sound opportunities remains, with trade buyers, infrastructure investors and investors from the Middle East and the Far East moving into the space once filled by financial buyers. An expertly handled auction sale remains a good route for securing the best price on the most advantageous terms. But there are some important ground rules to be followed:
- Avoid the avoidable – never has the adage “fail to plan means plan to fail” been more true. Whether or not formal vendor due diligence reports are commissioned from lawyers, accountants and other professional advisers, it is important for sellers to “know the assets” and undertake sufficient due diligence on them to identify any issues of concern to a buyer. The lack of perceived competitive tension and concern about the financial position of seller or target is increasingly seeing deals with completion accounts and tax indemnities back on offer. Equally important is investing time and resource in the presentation of due diligence information and the seller’s ability to answer queries raised about that information quickly, efficiently and comprehensively.
- Be realistic about timetable – it remains true that the seller runs the risk of undermining value in the target business and possibly the transaction itself without a robust process both in terms of identified milestones and an ability to stick to time-lines announced to buyers. Sellers should be realistic about timetable from the perspective of a buyer, particularly in a market in which the obtaining of debt finance can be a serious challenge.
- Test deliverability – it is now more important than ever that sellers ensure that prospective buyers can deliver a fully financed transaction. Vague promises about the availability of bank finance may prove to be illusory.
- Offer more even-handed documentation – in current market conditions, buyers are likely to take a more cautious approach to documentation and be more risk averse than has recently been the case. Equally there may be less appetite for undertaking extensive and costly due diligence without exclusivity or some measure of cost underwriting.