Selling a Business by Auction

Owners often ask, “Can I auction off my business?”  Selling by auction sounds appealing because it seems to guarantee the highest sale price.  However, some advisors reject the idea.

In this article:

  • First, I will discuss the potential challenges and pitfalls of using an auction.  
  • Second, I will discuss our approach to auctions and how it circumvents the pitfalls.  
  • Third, I will weigh the advantages and disadvantages of implementing an auction.
  • Fourth, I will discuss the types of business that are suitable for auction

I. Challenge of Auctions

In an auction for a painting, the second when the auctioneer says “sold,” a buyer and seller enter into a binding contract with the following terms:  The buyer will pay their bid by a certain date and the seller represents that the painting is legitimate.

As we parse the elements of the last sentence, we can imagine the challenges for a business sale auction:

  1. Binding Contract.  In a non-auction business sale, the buyer and seller negotiate their purchase agreements in what can be costly process.  However, in an auction, all bidders must submit binding offers that fill in certain blank spaces in a non-negotiable purchase agreement.
    1. Challenge: The contract therefore must be acceptable to all bidders.  
    2. One might ask, “What if the bidders submitted non-binding offers and the full terms of the purchase agreement were left to be negotiated after the completion of the auction process?”  That is unworkable because nothing stops the winning bidder from negotiating a purchase price lower than their winning bid or requesting terms that are unacceptable to the seller.  In either case, the seller might wish to resume conversations with the second-highest bidder.  The expectation that this might occur destroys the auction process.  Therefore, if bids do not bind bidders to a purchase contract, then effectively there is no auction.

2. Payment Terms In a business sale, the seller usually receives payment from the buyer in multiple ways, including, for example, payment at closing, a share of future revenue, and transition consulting fees, to name just three.  The seller and each buyer will be open to a different set of payment structures.  The purchase contract should be flexible enough to accommodate all qualified parties’ payment structure constraints.  The red, green, and blue shapes in the below diagram depict the payment structures that Buyer A, Buyer B, and the seller are willing to accept.  The region containing tiny diagonal lines represents the payment structures that all three parties are willing to accept.  If the purchase agreement is not flexible enough to allow any bids within that region, then at least one of the three parties will not participate in the auction.  For example, if the agreement requires that 100% of the purchase price be paid at closing, then neither of the buyers will ll participate.

3. Representations.  The representations that the seller makes about the business for auction must be comprehensive.  They should specify practically all that the buyer would uncover during due diligence.  In the event that representations are deemed materially false by an expert, the buyer will have a right to annul the purchase agreement.

II. How to Sell a Business at Auction

Here is how we would conduct an auction, although modifications can be made to fit the needs of a seller.


  1. Marketing. Market the business for sale at auction and invite qualified parties to participate.
  2. Contracts. Finalize all necessary sale-related agreements.
  3. Auction. Auction closes.  At this point, all sale-related agreements are fully executed.
  4. Deposit. Non-refundable deposit is put into escrow.
  5. Due Diligence. Due diligence occurs and financing is committed.
  6. Closing. Closing occurs unless one of the conditions for aborting the transaction is met.

Closing Documents

At the time of auction, all necessary agreements will be presented to the bidders in the form of binding offers from the seller’s entity and its owners.  These agreements will likely include the following (and possibly others):

  • Auction process agreement
  • Asset purchase agreement
  • Promissory note
  • Consulting agreements for the owners
  • Assignment agreements for assigning certain contractual relationships
  • Expert determination agreement
  • Escrow agreement


Critically, the representations and warranties section of the purchase agreement will include representations whose truth or falsehood can be determined during due diligence.  These will include a comprehensive list of facts about the business, especially regarding finances.  If any of these is determined to be materially false, where “materially” would be precisely defined, then the winning bidder would have the right to call off the deal and collect a breakup fee from the company.  The size of the breakup fee would vary per representation and be proportionate to the extent to which the company should have known the veracity of the representation.  A breakup fee sounds painful, but its presence will make buyers willing to place higher bids.

The contract will determine whether representations were materially false using expert determination, as explained in the next section.

Expert Determination

We have developed a 12-page expert determination agreement by working with several attorneys and business owners.  If incorporated into any contract, this agreement provides a legally binding answer to any objective or subjective question.  It can thereby resolve most predictable disputes.  It resolves disputes at low cost, at relatively fast speed, with minimal vulnerability to the answer being overturned by litigation, and with a high level of fairness and justness.

The expert determination agreement is the linchpin:  It is the deal’s source of integrity.  It enables each party to believe that the other is acting in good faith and will keep their promises.

Auction Type

The auctions that we see in movies are English auctions. In these auctions, bids are public and the highest bid is the price paid.

We recommend a Vickery auction, which is a second-price, sealed-bid auction: Every bidder, including the seller, submits a secret bid to a third-party attorney, who promises never to disclose the bids (aside from the second highest) to any other party, even after the auction closes. On the auction close date, the party with the highest bid wins, and the deal closes at the valuation of the second-highest bidder. If the seller is the winning bidder, then a deal does not happen. Note that the seller’s reserve price can remain secret, in which case it will not have an anchoring effect on the bidders.

Less Buyer's Remorse

If a participant's personal valuation of the company is independent of the bids announced in an English auction, then an English auction will generate the exact same result as a Vickery auction. It is proven that the price achieved by an English auction will exceed that of a Vickery auction only if a bidder changes their beliefs about the asset's valuation solely based on others' bids. Such changes in valuation can result in the winning bidder having buyer's remorse, which can ultimately result in their trying to get out of the deal, bad-faith actions, and wasted time. We want to avoid this. On the other hand, if a bidder is not influenced by other bidders, it is less likely they will have buyer's remorse. In summary, an English auction is somewhat manipulative, and that manipulativeness can come back to bite the seller.

More Participants

Our biggest challenge will be persuading people to participate in an auction. Anticipating the manipulation and possibly inflated prices generated by an English auction, buyers might choose not to participate. On the other hand, the Vickery auction's guarantee that a bidder will pay a price lower than their bid is inherently appealing. If we end up with more participants in a Vickery auction than we would have had in an English auction, then the Vickery auction might generate a higher sale price than an English auction would have.

More Likely Pareto Efficiency

One important goal of an auction is to place the asset in the hands of the party that will be able to reap the most value from it. However, it takes just one overzealous person with “fear of missing out” (or “FOMO”) to block an English auction from achieving that goal. A Vickery auction is more likely to result in the company's ending up in the right hands.

There are other auction types, but none is expected to generate a higher price than a Vickery auction.

If you would like to learn more about auction types, here is a good resource.

Optimal Deal Structure

Warning: This section and the next get a bit mathematical.

First, a couple of terms need to be defined:

  1. “Deal Structure” — or “S” for short — is the full set of terms of the purchase agreement, where negotiable values are included as variables (i.e. x) rather than as constant values (e.g. $3,000,000).
  2. “Buyer Value Function” — or b(S,P) for short — is the Buyer’s utility from acquiring the company, which is a function of Deal Structure (“S”) and the set of negotiated values (“P”) (i.e. price, interest rate, and value of seller note).
  3. “Seller Value Function” — or s(S,P) for short — is your utility from selling the company, which is again a function of S and P.
  4. “Combined Value Function” — or c(S,P) for short — is equal to b(S,P) + s(S,P)
  5. “Max Value” of a Deal Structure S is the maximum value of c(S,P) over all possible negotiated values for P.

When a seller negotiates a deal with a single buyer, their goal is to select S and P in order to maximize s(S,P), subject to the constraints that purchase price exceeds a fair market value and that the seller accepts S and P.

If we are conducting an auction, our goal for selecting S is different.  It can be proven that our goal is to select the S that has the greatest Max Value.  Further, it can be proven that the S with the greatest Max Value is the one with the highest reasonable number of terms (i.e. an earnout term should be included rather than excluded).  However, the values for P would be subject to constraints set by the seller.  For example, the seller would not allow a seller note to be paid over more than a certain number of years (e.g. 5 years).

Auction Business Specification

Together, we and the seller will specify S, s(S,P), and the constraints on values for all variables in P prior to the auction.

When a prospective acquirer places a bid, they will not only be selecting a purchase price.  We will provide them with an Excel file for calculating the function s(S,P), and we will ask them to select values for all variables in P, subject to the seller’s constraints.  In effect, their bid’s value will be the value of s(S,P) given their selected values for the variables in P.

Given that, a Vickery auction would be implemented in the following way:

  1. The bid generating the second highest value for s(S,P) will be communicated to the winning bidder (“Winning Value”).
  2. The identity, contact information, and bid of the second highest bidder will be revealed to all bidders, as proof that we did not act fraudulently.
  3. The winning bidder will be free to select values for the variables in P, subject to your constraints, such that s(S,P) = Winning Value.  The deal will be consummated under the winning bidder’s selected values for the variables in P.

How to Get Enough Bidders

When talking with prospective acquirers, we will never use the word “auction” because most people associate the word with the (English) auctions we see in popular culture and auctions sound like a bad deal for buyers.  Instead, we will simply request submission of offers by a certain date and explain that we will sell to the high offerer but with terms based on the second highest offer.

Announcing a cap on the number of bidders will help attract bidders.  Announcing that no strategic acquirers are bidders (if that is the case) will also help.

If a bidder we and the seller want to join is unwilling to do so because they do not want to risk losing and wasting time, the seller can offer them cash compensation in the event they are the 2nd, 3rd, or 4th highest bidder (of five or six).  More would be offered for being the 2nd highest than 3rd or 4th highest.


For our work on an auction, we recommend using a specific attorney we know for the following reasons:

  • We have a good working relationship with him, and given that the auction needs to be structured exactly correctly, we would need to work closely with the attorney.
  • Over 25 years of experience
  • Business sale transactions are an area of focus for him
  • Graduate of Columbia University School of Law, one of the top 5 US law schools
  • Economical rate of $150/hr
  • Excellent client ratings on a third-party website

III. Pros and Cons of an Auction

Whether putting a business up for auction is right for a seller can be a function of the seller’s personality.  Those who have a strong preference for order might prefer an auction mechanism.


  1. If there are at least two bidders, then an auction is expected to generate more value for the seller than negotiating one-on-one with each buyer.
  2. The high amount of structure required for an auction forces everyone to produce and act upon a high degree of clarity early in the process.  This reduces the likelihood of the deal falling through late in the process.  A high percent of the deals that are negotiated without an auction and reach the letter-of-intent stage fall apart before closing.  When deals fail to close, a lot of time is wasted.
  3. The representations the seller makes about the business are more credible because they are backed by a binding contract.
  4. The seller skips the effort of negotiating a letter of intent and closing documents because an auction requires no letter of intent and no negotiation


  1. The seller is limited to considering the buyers that are interested at one point in time rather than being able to speak with buyers that are interested over a longer period of time.  Therefore, the potential pool of buyers may be smaller.
  2. There is somewhat more work to do earlier in the process:  (a) Sale-related agreements need to be generated before a buyer is selected, rather than late in the process.  (b) The seller must decide upfront on precisely how they would value different possible deal structures.
  3. Once the seller has executed an auction agreement with the prospective acquirers, they cannot back out of it.

Ideal Auction Candidates

More important than the size of a business for sale at an auction is its inherent appeal.  Regardless of size, businesses that (a) are different from other businesses on the market, (b) are profitable, and (c) have clear growth potential are ideal candidates for auction.  Small business auctions can be as successful as large business auctions.

Auctions can work well in most industries.  Auctions for website businesses can be as successful and work in the same way as auctions for professional services businesses.

If you are unsure whether your business is a good fit for an auction, see the next section and ask us.

We maximize the value you realize by selling your business

At Next Bridge Advisors, a large part of our practice is selling businesses by auction.

Having been established for 13 years, we have built a network of 28,000 buyers and a unique combination of expertise in the finance, marketing, structuring, and dispute prevention aspects of business sales. We sell businesses anywhere in the US and internationally.

Email us at or learn how to maximize your earnings from selling your business.