The process usually runs in two rounds. In the first round, interested parties submit indicative offers based on the information memorandum. The best bidders receive access to the data room and meetings with management. In the second round, binding offers follow, together with a markup of the purchase agreement.
For the seller of a mid-sized company, competition is the strongest lever for a good price. It prevents a single buyer from dictating deadlines and terms. At the same time, it makes offers comparable, because all bidders bid on the same information basis.
The process requires preparation and discipline. A process letter sets out deadlines and the required content of offers. The seller is not legally obliged to accept the highest offer. Under German law, however, the seller must negotiate fairly (§ 311(2) BGB) and must not feign an intention to conclude a contract.
Example
Hypothetical example: Seven bidders submit indicative offers between €8.0 million and €10.5 million. Four move to the second round. The binding offers are €9.2 million, €9.8 million, €10.1 million and €10.6 million, so the gap between the highest and lowest offer is €1.4 million.
Auction process vs. exclusive negotiation
| Feature | Auction process | Exclusive negotiation |
|---|---|---|
| Buyers | Several in parallel | One |
| Price pressure | High | Low |
| Effort | Higher | Lower |
| Confidentiality | More people in the know | Few people in the know |
Sources
- Bürgerliches Gesetzbuch (BGB), § 311 Rechtsgeschäftliche und rechtsgeschäftsähnliche Schuldverhältnisse, Bundesministerium der Justiz / gesetze-im-internet.de