Are Bidding Wars Good When Selling a Website?

I once bought a cake for $420. Well, to be more accurate, I was at a fundraiser where my whole table bought a cake for $420. We were competing in an auction to raise money for my church’s elementary school. Why did we spend so much on a cake? Because we wanted to beat the other table that was bidding against us.

Bidding wars can be fun, fast paced, exciting, and when the bidding war is for your business, it can be flattering as well.  The general thought among people selling their website is that bidding wars are good when you are selling.  Entire marketplaces (e.g. Flippa) are even built around this idea that bidding wars work in a sellers favor.

But is this really the case? Do bidding wars help you get a better deal?

The Dangers of a Bidding War for Your Web Business

Bidding wars work great when you are raising money for a school and selling cakes, and they can also work well for high profile sales (e.g. Los Angeles Clippers), but when you are selling your business, bidding wars can actually do more damage than good if improperly managed. Here are a few things to consider:

Buyers Don’t Like Unexpected Bidding Wars

You might think “what do I care if a buyer likes a bidding war? It’s my business and I’m trying to get the most I can for it!” But you should care about the attitude of your buyer when you accept an offer. An offer is just an early step in the long process of getting your business sold. If you have a frustrated or bitter buyer early in the process, you greatly reduce your chances of completing the sale.

Additionally, some buyers will simply refuse to participate in a bidding war out of principle. These may be buyers who would be willing to pay more for your business in normal negotiations but refuse to be used as leverage to prop up another buyer’s offers.

Your Buyer Will Be More Likely to Back Out

By design, bidding wars extend a buyer beyond their comfort zone of what they are willing to pay. They use a natural point of leverage (other buyers who are willing to pay more) to increase a buyer’s bid. If a buyer’s reason for bidding higher for your business is just to beat “that other buyer”, they will be far more likely to back out at the slightest incongruity in due diligence. In fact, it may not even take an event in due diligence to scare the buyer away. Once the heat of the bidding war passes, they may realize that they were caught up in the heat of the moment and not be willing to finish the deal.

You Don’t Necessarily Get a Better Price

Bidding wars, by their nature, start with a price that is lower than what the market can bear.  The hope is that the low price will entice enough buyers (buyers who are hoping to get a deal) to drive the price above market value through competitive bidding.  This sort of strategy relies upon a bit of luck, timing, and the right mix of buyers bidding on your business.

A Better Strategy: Set Your Own Parameters

Rather than rely on luck and hope that the right buyers bid on your business, a better strategy is to define your own parameters and pricing expectations. Serious buyers understand that your business has value in your estimation, and if you come up with a reasonable asking price for your business, they will be willing to listen to your reasoning for your asking price.

This approach is beneficial because it sets the expectations upfront for the price of your business. Buyers are no longer bidding to beat another buyer, they are bidding because they are matching up the price of your business against the merits of the business.  Unlike the buyer who got caught up in a bidding war and now doubts whether they are making a wise investment, a buyer under these circumstances is far more likely to make it through due diligence since they will have answered some of the big questions about their investment.

This, however, isn’t to say that having buyers compete for your business is bad. Even if you name a starting asking price, a buyer is still going to try to acquire your business for the best price possible. Because of this, having the pressure of other buyers can be instrumental in getting the best price for your business so long as you do not fall into the problems stated above.

How to Properly Manage a Bidding War

There are occasions when it makes sense to intentionally setup a bidding-style auction for your business. At Quiet Light, we have made this recommendation a few times and helped our sellers through the process of running a bid-style sale. Even if you don’t intend to start an auction, you may find yourself in the fortunate situation with multiple buyers bidding on your business. How you manage those bids can make a huge difference in both price and probability of your buyer completing a deal.

Here are a few general rules we try to follow in any bidding situation:

• Be Upfront with Buyers. Auction sites work because a buyer knows upfront that they are entering into a competitive bidding situation. If you plan on offering a site that will be auctioned off, tell your buyers that you intend to accept bids and that you expect the bids to be competitive. Some buyers may back out, but those who stay will appreciate knowing that they have a fair shot of winning the deal.
• Make Clear Rules. Any person who is bidding on your business competitively wants to know that they have a realistic chance of submitting a winning bid. Be sure to explain to buyers as early as possible what the rules of submitting a bid will be and how they can be the most competitive. Let them know what is most important to you.
• Limit the Back and Forth. Don’t allow the competitive bidding process to go back and forth between two buyers for an extended period of time. If you have a bidding battle developing, inform each buyer that there is competition, then give them the option to submit a final bid. Make your decision on their final bids.
• Never Disclose Another Buyer’s Bid. Buyers can be ruthless if they know they are competing against another buyer. They will ask you what the other bid is, or they may ask you what they need to do to win the business. Always remember that an offer is confidential. Encourage a buyer to submit the best bid that they personally are comfortable with. This will reduce the possibility of them having buyers remorse from a competitive bidding process.
• Name a Deadline. Let buyers know when you expect to review bids and when you expect to have a decision made. Buyers will be more willing to submit a bid if they know that there is a clear deadline and decision date.  Let them know that you will be available to give them whatever information they need to make an informed decision (within reason).
• Encourage Bidders to Stay Within Their Comfort Zone. Your goal in a competitive bid is to get the highest bid from a buyer that they will be willing to actually pay. You should encourage your buyers to submit their top end bid. Remember, a bid is worthless if it doesn’t result in a closing.
• Make Yourself Available. Understand that while buyers are considering what to bid for your business they will need information. Make yourself completely available for phone calls and quick turnarounds of information requests. Fast turnaround on information will allow buyers more time to consider what they are willing to offer.
• Follow Up with Losing Bids. For those who submit non-winning bids, follow up with them and explain to them what you liked about their bid and what you did not like. This will give you a potential fall-back position should the winning bidder fail to close the business.

Finally, don’t feel as if you need a bidding war to get the best price possible. While they are certainly useful to elicit a strong bid from a buyer, they aren’t necessary. Learning other negotiating techniques and being confident in your pricing goes a long way in getting the best price possible for your business.

Have you participated in a bidding war in the past? What was your experience? Did you like it? Hate it? Share below.

photo credit: djwtwo via photopin cc