Avoid These Costly Mistakes in the Business Sales Process – Post #21
February 19, 2018
5 Pitfalls to Avoid When Researching How to Sell Your Business
March 7, 2018
In previous episodes within this series, I’ve talked about core advisory professionals you need on your businesses sales team. However, you will also need more professionals who come into the sales “game” at the key moment of the sale of your business. So today, we’re going to talk about choosing a business broker, an M&A Advisor, or an investment banker.
Podcast Time Index for “The Business Broker, M&A Advisor, or Investment Banker”
00:32 – The Business Broker, M&A Advisor, Investment Banker
01:21 – Three specialist players for your team
02:54 – The Business Broker
07:12 – The Mergers & Acquisitions Advisor
08:58 – The difference between an M&A Advisor and Business Broker
12:27 – Investment Banker
13:55 – Which player do you need?
16:43 – Use your team to pick the right player
A Broker, a Mergers & Acquisitions Advisor, and an Investment Banker can each facilitate business sale negotiations. Mostly, they initiate and mediate the interactions between the buyers and sellers. In fairness, each one provides a similar service. However, each has a different skill set that provides different advantages and disadvantages for particular buyers and sellers. So let’s identify the players, look at their skills sets, and decide which player you need for selling your particular company.
#1. The Business Broker
Also known as a business transfer agent, or intermediary, a business broker acts as a mediator between buyers and sellers.
Who Does He Serve?
Typically, this broker serves smaller, local or regional “mom-and-pop” companies that gross less than five million dollars in yearly sales. According to the Exit Planning Institute (EPI), around five million companies fall into this small business category. Those companies usually sell for less than five million dollars and sell to individual buyers. For the most part, they also have less than one million dollars in EBITDA, or Earnings Before Interest, Tax, Depreciation, and Amortization.
How Does He Get Paid?
Business brokers do not tend to charge sellers an upfront fee for services. If they have to clean up a huge mess to get the seller positioned to sell, however, they may charge an initial set-up fee. But most of the time, they don’t. Instead, they often charge a commission that funds and pays them at the time the business sells.
What Does He Expect from the Sellers?
Additionally, the broker requires the seller to compile a multitude of materials to prepare for the sale. Those could include marketing materials used, past and present financial reports, or financial forecasts. In medical fields, a business broker might ask for total patient counts and demographics. Sellers may even have to list what types of procedures, services, or products they offer and how many they provide or sell on an average day. Although sellers will have to provide quite a bit of documentation to the broker, they don’t usually have to go to an accountant for help or additional compilations.
What Benefits Does He Provide?
Similar to a realtor, the business broker walks sellers, and sometimes buyers, through the sales process. The facilitating broker can list the business for sale, develop marketing strategies to attract buyers, arrange business walk-throughs, meet with buyers’ agents, answer questions, and help negotiate sales terms and conditions if issues arise. Essentially, he puts lipstick on the business to make it look pretty to attract a buyer.
He also acts as a cushion, or an emotional barrier if you will, between the buyer and the seller. His objectivity and creativity repairs hurt pride and dampens fiery tempers if the sales process does not go according to plan.
#2. The Mergers & Acquisitions Advisor
The next professional able to stand in as our special teams player is the Mergers & Acquisitions (M&A) Advisor. This agent bridges the gap between the business broker’s small businesses and the investment banker’s large companies.
Who Does He Serve?
The M&A Advisor will typically work with national or international companies that gross between five million dollars and 100 million dollars in yearly revenue. According to the Strategic Exits Corp, these mid-sized companies usually sell for 12 to 15 million dollars and have a 30 million dollar EBITDA range.
How Does He Get Paid?
Like a business broker, the M&A Advisor will work on commission dependent upon the size of the sale and upon the closing of the sale. But the M&A Advisor could charge additional fees. Charges can include but are not limited to, initial set-up fees, tax structuring fees, legal structuring fees, or legal service fees.
What Does He Expect from the Sellers?
Since this business sale potentially merges companies across state or continental lines, M&A Advisors will require more documentation from the sellers than a broker does. The larger the business, the more complex the sales process gets. In order to provide an accurate value on the company, the M&A Advisors need documents, reports, and pro formas from all locations and from all CPAs working with the locations.
What Benefits Does He Provide?
An M&A Advisor can match buyers and sellers like a business broker. Unlike a broker, though, the M&A Advisor can help arrange financing, provide outsourcing, structure the transaction, and provide legal or tax advice if they have lawyers and accountants on their teams. He is a little bit more hands-on than the business broker.
#3. The Investment Banker
Out of left field, this Investment Banker comes into play, and he provides services that business brokers and M&A’s typically don’t.
Who Does He Serve?
The Investment Banker works within the large international business space left by the brokers and advisors. Typically, companies in this realm sell for 100 million dollars or more and operate in a similar EBITDA range.
How Does He Get Paid?
Similar to the others, this professional can make a percentage-based commission upon the sale of the business. However, he can also charge for services by the hour. Finally, if the business sale or acquisition includes stock shares, he could get paid a percentage of stock shares or in stock options.
What Does He Expect of the Sellers?
Because of the complexity of these type of international transactions, the Investment Banker requires a broad litany of complex financial, logistical, and historical business documentation. Sellers will need an army of lawyers and CPAs to digest data points and explain terms and conditions within the deal.
What Benefits Does He Provide?
Unlike most brokers and advisors, the Investment Banker is formally licensed as a broker/dealer within the Securities & Exchange Commission. This means that he can move privately held businesses into publicly traded companies. He can also provide a broader line of financial services because of the multiple team members, attorneys, and CPA’s his firm has on hand.
Choosing Which Business Sales Facilitator You Need
So there are the three different players that can facilitate the business sales process. But how do you know which one to choose?
- Apparent in the discussion above, size matters. Your company’s revenue and valuation will likely determine which professional you choose. Business brokers can usually take care of small business sales under 5 million dollars. M&A Advisors tend to handle mid-size mergers between 5 and 100 million dollars, and Investment Bankers guide the reins of large company sales over 100 million dollars. So the sales price helps you determine who you need on your special team.
- Equally important to you, the buyer matters. If you’re selling to an individual, mom-and-pop buyer, you’ll probably choose a business broker. However, if you’re dealing with private monies like syndicates, hedge funds, or international corporate buy-outs, you’re probably going to use an M&A Advisor or an investment banker.
- Finally, help matters. Brokers are good at handling relatively simple sales transactions. If you don’t need a lot of help, and your deal is fairly simple, a broker may be all you need. On the other hand, if you’re dealing with a bit more complexity, multi-state laws, or multi-country laws, you could choose an M&A Advisor or an investment banker. For consideration, if you need to get your company to auction, you will most likely require the services an M&A Advisor can provide.
Let Your Core Advisory Team Guide Your Sales Facilitator Selection
Having one of these special facilitators is vital whenever you’re getting ready to sell your business. He is going to walk you through the entire process and make your business look good to potential buyers. If needed, he can guide and direct your actions and temper your emotions.
Just like the importance of having a sharp attorney when creating a sales contract, you will want a sharp Sales Facilitator when implementing it. Now, there are some tactics we can use for negotiating with these individuals. At this point, though, I’m going to advise you to lean on your lawyer to work with all of that. For the most part, though, you will have to hire one of these three professionals.
As you walk through this sales process, your core group (the CPA, the CFP®, and the attorney) will help you identify which special teams player you need to use. While each facilitator can help connect buyers and sellers, each one has a unique skill set. And all of them play in a different marketplace.
Speaking of buyers, our next article discusses the different kinds of business buyers. Knowing who could potentially be buying your company, allows you to make changes to better attract them.
So friends, remember what I always say. Life is hard. Business can be complicated. Money doesn’t have to be. Let’s continue to make our lives, at least, financially simple.
