When deciding the method by which to sell a business, auctioning
is an infrequent option among Canadian business
owners. Yet, this seller-oriented process is designed to secure the
best price and terms possible business owners.
By creating competitive tension, the auction process
compels bidders to put forward the highest price they would be
willing to pay in order to succeed.
Some argue that bidders in an auction tend to overpay for a
target: while this may be due, in part, to a bidder merely wanting
to "win" the bid, there's also an issue of
information disclosure at play. Unlike private negotiations where
information and disclosures about a target company may flow
readily, there is a risk of information asymmetry during an
auction, whereby a bidder has less information upon which to base a
bid, possibly resulting in overvaluing a target. The auction
process, it is then argued, may result in gains favouring a seller
which are otherwise unlikely to be achieved
