How I Would Sell My Company
As an advisor, I watch middle-market sellers go through the emotionally-charged process of finding a representative investment bank to assist them in their company’s disposition. In doing so, I often ask myself, “how would I go about this process?” This is, of course, rhetoric (most of those on our team have been on either the buy or sell-side of a transaction–both as advisors and owners), but the exercise is warranted, given the fact that we see dozens of companies just get it wrong.
Here’s how I would proceed…
I would find a couple investment banking firms. Typical stats for the lower mid-market show that sellers typically vet 1.7 firms before deciding on their investment bank of choice. But remember, while most deals have nine lives, there is typically only one shot to get it right. Spending the time on finding the right fit is well worth the cost in time and resources. In sourcing the firms, I would probably mix it up a bit as to how I sourced the two or three I would expect to receive a pitch from. I would find one or two local (most likely through my existing network of CPAs, attorneys, wealth managers and/or other professionals), a regional firm or two and probably poke around on the web to see if there were some industry-specific firms that had experience within my market. Having experience in a particular niche, while helpful, is not as much of a necessity as it may have been even five years ago.
Before I sat down in a meeting, I would prepare to ask each group presenting the following questions:
- What relevant experience do you have in the market?
- What valuations are you seeing in my specific niche?
- What do you think I would be able to sell for given current market conditions?
- What do you think the valuation differential might be between a strategic vs. financial buyer?
- Can you help provide me with an after-tax, after fee payout I may expect to receive? (they may need some help from CPA, tax folks and financial planners on this one and it may take some time)
- Please explain your typical process?
- Give an indication on the amount of time the process may require?
- What are your engagement fees? Backend fees?
I may even send this list and ask for it to be specifically included in the presentation.
Fees, Finders and Folly
Colleagues and fellow bankers will hate me for saying this , but do not be afraid to negotiate on fees–but don’t be indignant. Remember, you get what you pay for and this process can take many complicated turns. Bargain shopping for a pair of shoes is much different than bottom-feeding for the right advisor. I have a relevant and recent example. We ran across a company that was on the market with an exclusive, but unlicensed representative. The seller, who had an oil & gas distribution business with EBITDA north of $2,500,000 a year, had opted to find the best deal on getting representation for selling the company. This “broker” who was a commercial real estate agent gave the seller an absolutely screaming deal on both the engagement and backend fees, charging less than he would for a comparable real estate transaction. The results were disastrous:
- A pitchbook or marketing deck was never created
- Only five buyers were presented the opportunity
After the agent realized he was in over his head, he began the outreach to various other shops in order to get himself out of the predicament. I spoke with him by phone. The conversation went like this(after similarly explaining the situation I just painted):
Agent: “So, how do you typically find your buyers?”
Me: “That’s what your client is paying you for, are they not?”
Agent: “I’m not getting paid yet, but I will get paid $75,000 if I can find a buyer for this business.”
Unfortunately, he had painted himself into a corner. With his unwillingness to capitulate on his meager payout, the inability of a licensed investment banker to share fees, and the lack of incentive for ANYONE to partner on the deal killed the deal on the vine. I recognize this is likely a ridiculously extreme example, but it’s the best I could use to paint
The small difference on fees can make a huge difference when it comes to weighing the differences between an investment banker and a business broker.
If you’re a smaller company with say less than $1,000,000 in EBITDA, you’re likely not going to have the same level for quality options than perhaps some of your bigger counterparts. Many shops, particularly some of the larger regional firms have pretty strict bottom-side thresholds on the size and nature of the deals they may be willing to represent. However, if you are big and sexy enough make the bankers work for it. You’ve earned it in your business and they should have to earn it too.
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