Most business owners only sell one business in their lifetime. The results of that sale can have a major impact on the financial future of the family. For most business sales we recommend that the seller engage a professional specializing in business sales to assist. There are two broad categories of professionals that engage in business sales – business brokers and merger and acquisition advisors.
What should the seller be looking for? This article will discuss the type of services offered by both groups and help the business seller decide which professional to use.
The first criterion is the type of business. Generally, business brokers specialize in “Main Street” types of businesses such as dry cleaners, gas stations, restaurants, and convenience stores. M&A advisors specialize in more B2B types of businesses such as manufacturers, distributors, information technology firms, etc.
Size of Business – BB’s specialize in businesses under $1.5 million in revenues and M&A’s represent larger businesses or smaller businesses with a high component of technology or intellectual property.
The Targeted Buyer – BB’s are generally targeting individual buyers while M&A’s are seeking to locate corporate buyers.
Business Valuation – BB’s specialize in commodity-type businesses that have “rule of thumb’ valuations that are consistently applied to arrive at a business selling price. There is usually a pretty narrow range of valuations applied to these businesses. M&A’s are recommended where there can be a broad interpretation of “strategic value” and rules of thumb do not apply. A high component of Intellectual Property, a unique niche, and a hard-to-penetrate customer base are characteristics that can demand strategic value, and purchase prices can vary widely.
The complexity of Transaction – BB’s are generally selling to individual buyers that have a finite approach to structuring the transaction. The contracts are usually fairly straightforward and the negotiations focus on price, financing, and seller notes. For the M&A’s the targeted audience is the corporate buyer with vast experience in acquiring businesses. They employ both an internal legal team and outside council and make the purchase contracts quite complex. The number one goal is protecting the corporation. The contracts are 35 pages of complex legal language and schedules of reps and warranties. The seller will need someone that is familiar in navigating in that environment. Corporations generally send in a due diligence team that is well versed in finding every little wart in a seller company and will attempt to reduce transaction value during the process. The seller will need good advisors to offset these pros.
Exclusivity – because the BB’s are targeting individual buyers, their audience is vast so exclusivity is sometimes required and sometimes not required. Business sellers often engage multiple non-exclusive BB’s to ensure the broadest coverage in presenting their business to the buyer audience. BB’s are often part of a network of BB’s to help broaden this exposure. Sunbelt Business Brokers and BBN are two very good networks.
M&As require exclusivity because they are targeting corporate buyers and the audience of potential buyers is finite. These corporate buyers have M&A departments or sometimes the president handles the process. If a target is presented to a corporate buyer by more than one professional the credibility immediately drops and the chance of serious interest is reduced significantly.
Number of Clients Represented – BBs want to represent as many businesses for sale as they can. When contacting their vast network of individual buyers it is a real benefit to have a vast inventory of companies. Because of this, their approach is more of a mass mailing, mass email, post the business on a business for sale Web site, type of approach and their attention is spread over 25 or more simultaneous clients.
M&A’s usually limit their number of engagements to 3 or 4 per professional at a time. Their approach is very hands-on and labor-intensive. M&A usually relies on a direct selling approach of calling the buyers and talking with the M&A department or the president. Often M&As will have specific industry niches and will have a customized database of contacts. They often have had several prior contacts with the buyers and are able to penetrate the call screening that is set up to protect these individuals. A corporate buyer does not buy through a posting on a business for sale Web Site. A corporate buyer will open 2% or less of letter solicitations. A corporate buyer will read less than 1% of unsolicited and unknown emails. Corporate buyers demand personal and professional contact to get their interest.
Up-Front or Monthly Fees – BBs generally will charge a minor up-front fee to begin the engagement or have a simplified valuation completed. Generally, there is no monthly fee charged. M&A’s generally charging either a substantial up-front fee or a monthly fee in the $3500 to $10,000 per month range depending on the size of the business.
Success Fees – BBs generally charge a success fee of 10% of the transaction value. M&As generally have a sliding scale based on the anticipated size of the business. The known Wall Street firms that sell the mega businesses will not touch a transaction where they are not guaranteed $1 million in fees. The big regional firms require at least $750,00. The M&A firms that deal in the lower end usually charge considerably less than that with a minimum of $150,000 cash at close. If your transaction value is in the $10 million range, count on paying your M&A firm $300K to $400K.
Conclusions – The deciding factor is cost-benefit. An M&A firm is going to cost a lot of money and you are going to be paying either upfront or monthly fees without a guarantee of success. If your business is smaller and is a commodity-type business or Main Street business where the target buyer is an individual, an M&A firm will not add much value and is not worth the fee.
If your business is larger, complex, unusual, strategic, with a high component of intellectual property or technology, and subject to a broad interpretation of the value in the marketplace, an M&A firm is the right choice. In the final analysis, is a swing of 20% in your company’s selling price worth $5,000 per month for 8 months?
Dave Kauppi is the editor of The Exit Strategist Newsletter and a Merger and Acquisition Advisor and President with MidMarket Capital, Inc. MMC is a private investment banking, merger & acquisition firm specializing in providing corporate finance and intermediary services to entrepreneurs and middle-market corporate clients in information technology, software, high tech, and a variety of industries. Dave began his Merger and Acquisition practice after a twenty-year career within the information technology industry. His varied background includes positions in hardware sales, IT Services (IBM’s Service Bureau Corp. and Comdisco Disaster Recovery), Software Sales, computer leasing, datacom, and the Internet. The firm counsels clients in the areas of merger and acquisition and divestitures, achieving strategic value, deal structure, and terms, competitive negotiations, and “smart equity” capital raises. Dave is a Certified Business Intermediary (CBI), a registered financial services advisor representative, and a securities agent with a Series 63 license. Dave graduated with a degree in finance from the Wharton School of Business, University of Pennsylvania. For more information or a free consultation please contact Dave Kauppi at (630) 325-0123, email email@example.com or visit our Web page http://www.midmarkcap.com