By Mark Johnson, president M.D. Johnson, Inc.
The definition of an Auction is “a public sale in which goods or property are sold to the highest bidders.” Dealers know auctions as the place to sell things you don’t want, and a place to acquire things they want to buy at a wholesale price, much like a foreclosed home or property lost to a lender. The auction process is about exposing an asset to the largest number of people in the shortest period of time. That is a great time line for a broker but not necessarily for a seller or a buyer.
In the sale of dealerships and dealership properties, exposing a potential seller to a wide variety of buyers is counterproductive when confidentiality is paramount. The business sale auction process was developed by business brokers and later honed by investment banking firms, not vice versa.
A business broker was skilled at the packaging of a business for sale but could not have any real in-depth market knowledge about every type of business. Business brokers developed lists of potential buyers, put together a “tickler” document, and sent that out to those buyers interested in that line of business. EBITDA, total sales, and geography were typically the main criteria. Manufacturing, distribution, plastics, medical, etc. are common businesses sold via the auction process.
Business brokers sent the packages to those companies that seemed to have a fit. The broker was not burdened by a need for in-depth knowledge about the business or the buyer, and relied on the buyer to set the price. The broker acted more as an administrator of the sale process, not as a trusted advisor.
Not knowing the business, or ever owned a like business or worked in the business, didn’t really create a barrier to the broker finding a buyer. Whether the price paid reflected the value was determined by the seller and the seller’s advisor. Once the buyer and the seller agreed on the price, the process was moved to the attorneys, and the broker managed the relationship until the deal closed.
It sounds tidy except for one thing. Now 20, 30 or more individuals know that your business was or is for sale. If the buyer is, say, a private equity group or family office that buys EBITDA (net income) and is more focused on a sound business and is agnostic about the industry, this level of disclosure is likely not an issue. Also, if the sale is in an industry where there are a huge number of the same type of sales, competitors gain little from knowing your business is for sale.
Fast forward to the homogenized auction process and apply it to the franchised new vehicle business, where the following are crucial:
- The car business is one of the only industries where the people who supply your products get your financial statements every month and may penalize you for wanting to sell the business.The manufacturer can react negatively to an owner “leaving the family,” and this can create a plethora of issues for a seller.
- In-depth knowledge of the buyer. A good intermediary is very cautious about who he or she recommends as a buyer, and more importantly, with whom they enter into an agreement. A good advisor, and a smart seller, should know the “credit score,” so to speak, of the buyer.
The buyer is not homogenous in the auction process, regardless of such claims. Some buyers never close, some always negotiate, some sue all the parties, some have sued the manufacturers, some don’t honor customer commitments. The description is endless. Going down the path with the high bidder is not insurance against a failed deal, turn down or ROFR from the factory, or a 40 percent employee attrition rate in 24 months.
The high bidder often becomes the low buyer. Some buyers have a reputation of being the high bidder and end up paying less than the low bidder. The right advisor spends the time to figure this out and to advise clients whom they should and should not do a deal with.
- Selling a dealership is like getting naked in the middle of the street for money. You need to be reasonably assured that the person who convinced you to do this will actually pay you and give you your clothes back. Once the factory and the world knows that a dealership is for sale, the worst case scenario is not closing. Your employees become targets of neighboring acquirers and all that that entails.
The auction process does NOT bring the most money, does NOT assure the buyer of a closing and does NOT benefit a seller. What an auction process does is motivate a buyer to put together a package that gives the buyer adequate time to study the company, the market and the opportunity. Being the high bidder with 60 days of carte blanche due diligence does not make you the high bidder. It puts you in line first to negotiate.
I recently read a package where the all-in purchase price would be more than $100 million. The broker running the auction provided a high graphics, extremely low quality, smoke and mirrors, useless data package that in no way was up to the quality or detail necessary to make a $100 million decision. In fact, many really good buyers had no interest in the transaction because of the auction process.
The seller was deprived of confidentiality, quality representation, the opportunity to determine what is best for the family legacy, and “what has the highest likelihood of closing”.
What sellers get in the auction process is a buyer who simply has figured out how to be in front of everyone else, kill the sales process momentum, and how to inevitably deliver a lower price and lower quality buyer to the seller.
In the automobile business, good intermediaries already know the players, know their “credit”, their reputation with the factory, and their finances. A really good advisor will negotiate the best sales price available with someone that will close in less than a week. Any more than that, the asset is overpriced.
When selecting a professional to assist in both the acquisition process and the sale process, it is necessary to spend time talking to a number of people before hiring professionals. Also, don’t be afraid to call on references. Sellers don’t have to identify themselves to a referral. The referred person will almost always understand the need for the potential seller remaining anonymous.
Threshold questions for any broker, advisor or intermediary.
- If you are paying your advisor a percentage of the purchase price, or real property, sale or lease, is involved, obtain a copy of their real estate license and Errors and Omissions insurance.
- In addition to the proper licensing and insurance, a professional intermediary will have a professional liability policy, such as that held by a lawyer or a CPA. If you get advice that is not responsible or well thought out, you can obtain relief from the insurance company. An intermediary with a professional liability policy must follow the conduct guidelines required under the policy.
If you would like to find out how MD Johnson, Inc. has closed 100% of the buy sells submitted to the manufacturer over the past 16 years, please call or email to find out.