What Does Auction Process Mean?
An auction process is the procedural steps involved in the sale and purchase of goods and services, in which the selling price is automatically discovered during the course of open competitive bidding. The procedure depends on the type of auction adopted, and it is comprised of steps for inviting, receiving, evaluating and accepting bids. It is the mechanism employed for discovering the best price for the transaction.
The auction process is significant because, over a period of time, it has evolved as an important mechanism of open price discovery for the sale of:
- Licenses for the mining rights or the spectrum;
- Rare collectibles;
- Real estate;
- Property seized by legal actions; and of course
- Private companies for sale.
Investment bankers usually take their companies through an auction process in order to generate significant competitive pressure to drive the purchase price up.
Divestopedia Explains Auction Process
In the context of buying and selling middle market companies, an investment banker likely will undertake an auction process to attract the highest price for a company. This process will entail casting a very wide net to multiple buyers, who will compete for the target by bidding the price up. Most buyers dislike an auction process for obvious reasons and prefer proprietary deals where they have more control over the final price.
However, the highest price is not the only parameter that sellers should seek. Other important factors include the transaction structure, the buyer's plans for the business, the post-sale integration plan, etc. A good auction process will yield the highest price, but should also give an indication to the seller of these other factors. A good investment banker would analyze all the bids to generate the best alternative in terms of price and those factors that better line up with the seller's requirements.