Guhan Subramanian

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   <li>What’s the best way to buy or sell an asset—through a negotiation or an auction? The answer depends on the nature of your buyers, the asset in question, and your own priorities.</li>
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   <li>If you think you can get a sufficient number of the buyers you want to participate, an auction makes sense—unless you expect valuations to range widely.</li>
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   <li>If you can write precise specifications for an asset, it’s probably wise to purchase it through an auction. But if the asset has the potential to create a lot of value, or a relationship or service is important, a negotiation usually works better.</li>
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   <li>Also consider whether your deal requires secrecy, transparency, or speed. Auctions work best when transparency or speed is critical, and negotiations when discretion is a priority.</li>
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</article-ideainbrief><p>When you have something to sell, the best way to get a good price for it is to hold an auction, conventional wisdom tells us. The success of the online giant eBay is a monument to that belief, and a lot of academic research supports it as well. Auctions aren’t just for ordinary folks trying to dispose of antique teddy bears or 1970s wallpaper, either. Executives routinely auction off divisions or subsidiaries of their companies; after all, who can fault them for the prices they get if those prices are the outcome of a competitive bidding process?</p>

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<p><span class="reprint">Reprint: R0912L</span></p>
<p>What&#8217;s the best way to buy or sell an asset? Should you hold an auction and accept the most attractive offer? Or should you identify the most likely prospects and negotiate with them privately?</p>
<p>Auctions became increasingly popular after the internet opened wide the universe of potential bidders. The wrinkle is, auctions often set up win-lose relationships between buyers and sellers, says Subramanian, a professor at Harvard&#8217;s schools of business and law. In many situations, negotiations lead to better results. Before you decide on a process, carefully consider the nature of the buyers, the characteristics of the asset in question, and your own priorities.</p>
<p>If you can get enough of the right buyers to participate, an auction generally makes sense&#8212;unless you expect a wide range of valuations. In that case, an auction could leave a lot of money on the table&#8212;as it did in the sale of Cable &#038; Wireless America. CWA&#8217;s assets were uniquely strategic to the winner, but because it had to beat the second-highest bidder by only a little bit, the company got them at a price far below the value the deal actually generated.</p>
<p>Can you write exact specifications for an asset? Then you probably won&#8217;t go wrong with an auction. But specification can discourage creative collaboration between buyer and seller. If that will add value to your deal, or if a relationship is important, pursue a negotiation.</p>
<p>Finally, examine your priorities. When discretion is critical, a negotiation will work better, but when you need a transparent, speedy process, an auction is the more sensible choice.</p>

Negotiation? Auction? A Deal Maker&rsquo;s Guide

Reprint: R0912L What’s the best way to buy or sell an asset? Should you hold an auction and accept the most attractive offer? Or should you identify the most likely prospects and negotiate with them privately? Auctions became increasingly popular after the internet opened wide the universe of potential bidders. The wrinkle is, auctions often set up win-lose relationships between buyers and sellers, says Subramanian, a professor at Harvard’s schools of business and law. In many situations, negotiations lead to better results. Before you decide on a process, carefully consider the nature of the buyers, the characteristics of the asset in question, and your own priorities. If you can get enough of the right buyers to participate, an auction generally makes sense—unless you expect a wide range of valuations. In that case, an auction could leave a lot of money on the table—as it did in the sale of Cable & Wireless America. CWA’s assets were uniquely strategic to the winner, but because it had to beat the second-highest bidder by only a little bit, the company got them at a price far below the value the deal actually generated. Can you write exact specifications for an asset? Then you probably won’t go wrong with an auction. But specification can discourage creative collaboration between buyer and seller. If that will add value to your deal, or if a relationship is important, pursue a negotiation. Finally, examine your priorities. When discretion is critical, a negotiation will work better, but when you need a transparent, speedy process, an auction is the more sensible choice.

Negotiation? Auction? A Deal Maker’s Guide

Summary.

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