By Jason Fraler, managing principal, Anchor Peabody, LLC
Opening your business is the single most important event in a company’s timeline. Deciding to sell your business is usually the second most important event, so it is valuable to understand who can help you in the process.
We see deals mentioned all the time in our industry publications: “Company A acquires Company B,” but have you ever wondered who are the people who put together these deals? Sometimes the answer is nobody — Company A calls Company B and the deal is consummated without a third party, but most of the time there is an intermediary involved. For the layman, these intermediaries can be broken down into two basic categories: business brokers and investment banks.
Most of us will only get one chance to sell our business; let’s arm you with the proper knowledge so that you can pick the right one and affect the best possible outcome.
The business broker
Business brokers facilitate the sale process for smaller companies that have less than $5 million in sales, and/or a valuation of less than $5 million.
Sale process: This is very similar to selling a home. A basic overview of the company will be written and distributed to interested parties. Brokers will sometimes list your business on sales and trading networks (often online). The burden of the sale process can fall on the company, depending on the broker.
Price: 5% to 10% of the sale price, with no upfront fees/retainer
Pros: Lower fees; no upfront cost.
Cons: Minimal transaction experience (in scope); typically play “matchmaker” for parties with limited deal expertise; risk for subpar “story communication” and can exhibit a tendency to market firms to a limited number of established buyer relationships.
The investment bank
Investment banks handle large or sophisticated deals, especially those companies that will benefit from their dealmaking expertise. Typically, companies with sales of $5 million to $500 million, and/or $2 million in recurring annual EBITDA (earnings before interest, taxes, depreciation and amortization) will hire what is referred to as a “boutique” investment bank (sometimes referred to as an M&A adviser).
Note: Companies that are larger than $500 million in annual sales will most likely seek the help of Wall St. or “bulge-bracket” investment banks. Most of the companies in our industry aren’t this large, so for discussion purposes, we will focus on boutique investment banks.
Sale process: This is a sophisticated and proactive process designed to create momentum toward a sale and a closed, competitive auction, which maximizes valuation. A boutique investment bank develops high-quality marketing materials, which properly positions the company and articulates the opportunity. Boutique investment banks highlight the value, considerations and risks of a transaction, while tackling “deal killers” early on. They remove the burden of the sale process from the company by bringing in qualifying buyers, regulating buyer contact with management and facilitating information flow, thus allowing business owners to focus on their primary task: running the business.
Price: A percentage of the sale price (2% to 5%) referred to as a “success fee,” depending on the complexity and size of the deal, with an upfront and monthly retainer. Retainer fees cover the boutique investment banks’ cost associated with the significant investment of time and effort required to run an effective sale process. Should you decide to stop the sale process for any reason, you lose the retainer fees. However, if you follow through with the sale, your retainer fees will be credited against the success fee. This dynamic gives the boutique investment bank an ability to recommend when to walk away from an offer, because their costs are covered.
Pros: Wall Street transaction acumen coupled with personalized, senior-level service; will properly “package” and communicate the business’ story/merits to the market; boutique investment banks may have industry expertise.
Cons: Higher fees than a business broker; Boutiques may not offer a full-range of services found at a large bulge-bracket investment banks (i.e. IPOs, exchange of public securities, etc.).
Here are some questions to ask of your business broker or investment bank, to help find out if they are right for you:
• How much industry experience do they have?
• What are the biggest challenges my business faces in a transaction, and how will they deal with them?
• Who is in their network of contacts?
• What is their typical transaction type?
• What is their level of involvement once we have signed the engagement?
• Do they have a clear plan to create momentum for a successful transaction?
• In what may be the most significant event of my businesses’ lifetime, am I giving the transaction the best possible chance to succeed by choosing this adviser?
• Have they offered examples of, and am I comfortable with, their quality of work?
• Will I like working with this person?
• Will this person offer honest and candid advice?
The sale process can be stressful, overwhelming, time consuming, inefficient and a task outside the core competency of the management team. Selecting the proper adviser for your situation is a key to a successful transaction in order to maximize probability of success, execute the transaction efficiently, and prudently optimize valuation and terms.