For most business owners, selling a business is a once-in-a-lifetime event. These owners want to maximize their proceeds and they may be super salespeople, but likely have little experience or don’t know how to sell a small business. In fact, their exit may be the only meaningful transaction they experience. This is why it is extremely important for the business owner to choose between using an intermediary, such as an investment banker or a business broker, or closing on the sale himself.
Owners talk to other owners and share experiences, and sometimes, war stories abound. These can lead to hesitation on the owner’s part. But, at some point, every ownership group must transition out.
During a recent board session on exit planning, the owner announced it was time to sell, and the board supported this conclusion. The business had been profitable for 20 years, and the owner was ready to retire. The owner was thinking about running the sale himself, but the board cautioned him to consider how to get the most value for a lifetime of work. I was asked to summarize the client’s options on how to move forward, knowing that the size of the deal could determine that choice.
There are three choices to explore when it’s time to sell your company:
If you don’t know how to sell a small business, then consider an investment banker to be the most qualified to run the sale process. They typically have the deepest resources and the best information on deal structure and valuations. However, their minimum fees run $500K – $1M (depending on the circumstance). For a business under $1-2M EBITDA, this is usually not an option.
Once you sign an engagement letter, there will be a whirlwind of activity. The process is likely to run six to nine months. Bankers tend to deliver the most value throughout the sales process. According to JD Merit, using an investment banker can increase the sale price by 5-20% on average.
Bankers specialize by industry. It is important to know the dominant players within the industry, and not settle for a generalist. You also need to consider the personal chemistry of whom you may work with. You will be spending a lot of time with the banking team and will have difficult discussions. Owners should pick a bank team that they can work well with during tough times.
For businesses too small to be attractive to an investment bank, the downmarket version of this service is a business broker. While a broker is providing a similar service, they typically do not have comparable resources. They are likely to lack the marketing horsepower, valuation databases and market knowledge of an investment bank. Brokers and banks don’t really compete with each other, instead, they serve different market niches. For many private firms, this may be the best or only option.
Brokers serve a critical role in the lower market. They are different from banks, because market forces require it. The relationship is more personal than with a bank.
Typically, the brokerage consists of one or two brokers. Business brokers tend to be more pragmatic than a bank, because their clients are not as complicated as the larger clients that a bank services.
In general, business brokers can provide guidance with laws and regulations, save you time and help maintain confidentiality during the sale process. The Chamber of Commerce lists the top 20 brokers based on a series of pros and cons, as well as type of business, which can help narrow your search.
There are skilled CEOs who have great industry relationships, knowledge of the best buyers and great negotiating skills. If that is the case, the marketing function of a bank or broker does not add value. With a good lawyer, it is certainly possible to get a fair deal done. And, knowing how to sell a small business is also a great way to avoid fees.
Regardless of which path you choose, there are a few issues to consider:
As with most choices in business, getting the right team in place creates the foundation for success. This is true for running a going concern, as well as running a single transaction. Professionals can get you close to the finish line, but you, personally, will likely need to push the proverbial ball over the goal line.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Structuring and Planning the M&A Transaction and Key Provisions in M&A Agreements. This is an updated version of an article originally published on November 7, 2018.]
©All Rights Reserved. August, 2020. DailyDACTM, LLC d/b/a/ Financial PoiseTM
Bruce Werner is the Managing Director of Kona Advisors LLC and served as an outside director on private company boards for the last three decades. Kona Advisors LLC provides advisory services to the owners, investors and CEOs of private and family-owned businesses. With deep experience in governance, succession planning, finance, strategy and management issues, Kona…
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