After you’ve taken the time to think about your priorities when selling your business, it’s time to start aligning yourself with people who can add value during the process. There are a number of people who want to help you sell your business and get paid to do so. But who are the essential parties and what do they offer?
If you are a business with over $5,000,000 of revenue you are likely large enough and sophisticated enough to benefit from outside advisors instead of trying to do it all yourself. Engaging professional advisors at this early stage of the process can help prevent mistakes and provide valuable guidance as you move through this process.
The value and guidance you get from good advisors will be well worth the investment. Quite often I see owners delay engaging advisors because of the time and money it takes, but I am confident that involving them early will save you time, money, stress and regrets later in the process.
The Advisors You Should Hire to Help You Sell Your Business
It is important that you take the time to identify good advisors for your specific firm and situation. We recommend interviewing at least 3 professionals in each category before making a decision on who to hire.
Even if you already work with an attorney or an accountant, it will be beneficial to hear perspective from others. At the worst, you invest a little time to ensure you made the best decision, and you may end up discovering someone who will be much more beneficial to you throughout the process.
Seek out advisors that have specific experience working with both firms of your size and within your industry. Different size companies and different industries have unique attributes that some may not be as familiar with. Working with someone familiar with multiple aspects of your business can help ensure you consider all relevant factors and don’t overlook key areas.
Who Can Help Sell My Business?
The two most important advisors to engage in any business sale are an attorney and an accounting professional. Whether or not you involve an M&A advisor, business broker or investment bank is ultimately up to you — but having a good attorney and accountant is non-negotiable. They’re both an absolute must.
What an Attorney Helps With — and What to Look For
Hiring a good attorney is essential for selling a business. When I worked as a buyer, I highly encouraged the seller to engage his own legal counsel as soon as possible, and often required it as a prerequisite to us proceeding further.
This is because there are a variety of decisions, issues and documents that will come up throughout the process and, if the seller doesn’t have his own legal counsel, key items may get overlooked and the process may get delayed.
Business attorneys often specialize in certain areas, but most can provide professional guidance in a number of relevant areas including:
|Preparation||Deciding on whether to do a stock sale or asset sale and what implications that may have for you now and in the future.|
Ensuring organizational documents are up to date and fill in any missing information. As a seller, you “represent” they are complete and up to date as part of the sale.
|Initial Structure & Negotiations||Reading through offers and legal documents presented from buyers to ensure appropriate language.|
Editing and approving language in the term sheet.
Depending on the attorney, some may be willing to help structure and negotiate some of the terms of the sale.
Documenting the agreed upon terms of the sale.Inserting adequate protections when considering any form of seller financing.
|Business Specific Items||Dealing with intellectual property and the potential transfer of these items.|
Drafting, reviewing or approving employment agreements, non-compete agreements, promissory notes and customer contract details.
|Closing & Beyond||Editing and approving language in the purchase agreement.|
Addressing the nature of representations and warranties (often referred to as “Reps and Warranties”).
Ensuring final documents get signed and the appropriate money gets exchanged on time.
When interviewing business attorneys be sure to understand which services they provide and how much experience they have performing them with businesses of your size and in your industry.
What an Accountant Helps With — and What to Look For
Depending on the size of your firm, you may already have a sufficient accounting expert on staff. Either way you need to be sure the accounting professional you rely on has sufficient expertise to assist throughout the sale process.
Some key areas that accountants serve in the sale process are:
|Prepare clean and accurate financial statements||As we cover more in step 4, the sale process will require that you share detailed financial statements with various parties, including the valuation professional and potential buyers, throughout the process.|
Having professionally prepared financial statements, along with documented accounting systems and controls, also helps your company seem more professional and well run, which can enhance a buyer’s image and potentially impact offer price.
Note: Many buyers and lenders will require “audited” or at least “reviewed” financial statements which will require the use of an outside accountant.
|Prepare and validate other financial information requests||A variety of requests for financial information will come up during the process including during due diligence.|
These may include requests such as revenue recognition policies that need to be in compliance with GAAP, accounts receivable aging schedule, adjustments to “normalized” earnings, list of capital expenditures and details of working capital.
A common request from a potential buyer is that revenue and profitability be broken down by customer, location, product and/or service. Ensuring these numbers are accurate can have a meaningful impact on final price.
|Determine accurate purchase price allocation||This ensures the most effective tax treatment when selling a business. Purchase price allocation includes determining the value of tangible and intangible assets, including any write-ups, on the balance sheet. The difference between purchase price and the value of assets is allocated to goodwill.|
There may be different tax treatments resulting from your purchase price allocation, so ensuring this is correct can greatly impact the amount of money you walk away with.In addition, the calculations for purchase price can get complicated if the structure of your deal contains an earn-out or other similar forms of consideration.
|Assist in preparing future financial projections||It’s often helpful and necessary to have an accounting professional able to assist the buyer and any lenders in their evaluation of the company.|
Since you likely have the most knowledge about your business and how it may perform in the future, buyers will often ask for projected financials. This may include various scenarios given certain different assumptions.
There are many considerations that go into accurately projecting financial numbers and a good accountant can provide guidance to ensure you are accurately communicating expected performance.
Who Will Sell My Business?
Some owners may decide to sell their business on their own and others will prefer to hire an expert. The right answer for you may likely depend on the size of your business and the time and expertise you have to prepare the information and handle all of the inquiries and negotiations. My opinion is likely biased, but I strongly believe a good M&A Advisor can add significant value above and beyond the cost of using one.
Selling Your Business by Yourself
If your business has fairly simple operations and revenue below $500,000 or so, you may consider selling it yourself. If you choose this option there are online resources that will allow you to post your business on their site for a fee and will forward interested parties to you. The cost of this service is around $150 per year and may offer other options for an additional cost.
With this method, you are hoping that the right buyer comes to the site, at the right time (when your business is posted) and is open to working a fair and straight forward deal with you. You will be the person that puts together all of the marketing materials, and once you have the listing up and start getting interest from outside parties you will be the one that has to answer all the calls, respond to the emails, coordinate NDAs, send out information and move any qualified buyers through the process.
If you haven’t been through a sale before you will quickly learn that there are typically a lot of parties that claim to have initial interest, but either they don’t really have the money to buy your business, or don’t have the genuine interest to actually move through the process and make an offer. These non-qualified and non-serious buyers will typically be the majority and end up getting you nowhere. And that is in addition to those who claim to have interest in order to get information on your business so they can use it to help themselves in one way or another.
In my opinion, smaller businesses may choose to go to market themselves and get away with this, but for businesses over $5MM revenue there is enough money on the table, complexity in the business and sophistication among buyers that working with an M&A Advisor can provide a lot of value.
Note: It’s extremely important to ensure the business continues to operate successfully during the sale process. If you are still involved in the operations of the business, any time you spend trying to handle the sale yourself is time taken away from the business.
Who Can Sell My Business For Me?
What type of expert you hire will largely depend on the size and sophistication of your business. The types of parties that you may choose to work will fall into the category of Business Broker, M&A Advisor and Investment Bank.
Types of Intermediaries
All of these parties will perform services to help you prepare and sell your business, but the difference is in the types of service you receive, the level of expertise they bring and the amount of money they charge you. The cost of selling your business can largely depend on what type of professional you hire and the level of sophistication they bring.
What Do Investment Banks Do?
Investment banks tend to offer a broader range of services and are more involved in all stages of the process through various members of their team. Some of these services may include public offerings or services only applicable to public companies.
They will typically put together a longer and more detailed book, help manage the diligence process and be more involved with targeting and negotiating with buyers. Outreach is very proactive to qualified parties and the process is very organized and planned out.
An investment bank often will use its resources to gather a pool of interested parties, then run an auction type format where buyers submit offers in an effort to create additional competition. As indicated earlier, not all offers are the same and the value offered can come in more forms than just total price, so knowing what is most important to you will help here.
Investment banks will often create a number of valuation model scenarios for you, indicating a range of possible valuations under different circumstances. Also, if any external financing is needed, the investment bank can handle raising or facilitating additional capital from other sources. Due to these additional services and more complex structures, the regulatory bodies require investment banks to formally register with FINRA and carry certain licenses.
How Investment Banks Make Money
Investment Banks typically have minimum fee requirements which is why they usually work with larger companies, more complicated transactions and public companies in order for their fee level to make sense.
It is common for an investment bank to charge a retainer, paid monthly or in a lump sum, at the beginning of the engagement and a success fee that is paid as a percentage of final price at closing. This larger fee is partially because they have to pay a lot more people who are involved in the transaction. In addition, the more sophisticated transactions require more tools, research, and data in order to complete the process.
The amount charged by investment banks will often depend on the complexity of the transaction, but even a smaller investment banking deal would likely be charged a $50,000 retainer plus 5% of the final sales price. The retainer also helps offset costs during the process and separate serious sellers from those just looking to see how much their firm may be worth.
What Do M&A Advisors Do?
M&A advisors & IBs are similar in their offerings, though there are certainly some differences. M&A advisors bridge the gap between the smaller businesses that are sold by business brokers and medium to larger size businesses that are clearly led by large investment banks.
Similar to investment banks, good M&A advisors maintain relationships with a variety of firms, who are actively seeking opportunities in the space. Rarely do M&A advisors simply place ads on a website. Their marketing process involves proactive, targeted outreach to multiple qualified buyers in order to generate competition and drive a higher price. M&A advisors can help you understand valuation and structure expectations within your industry in the current market environment.
M&A advisors and investment bankers typically sell companies to other companies, or institutional investors like private equity funds and family offices. The transactions involved at this size and stage of the market tend to be somewhat complex and require a level of sophistication and understanding in corporate finance not commonly found with brokers serving smaller companies.
Depending on the transaction structure, some lower middle market transactions do not require the advisor to be licensed under the securities laws. You will find that most M&A advisors are not licensed and are not required to be.
How Do M&A Advisors Get Paid?
Although the typical fee charged by M&A advisors can align with either the investment banking model or the business broker model, we tend to see the success fees fall in the 3% -7% range with some charging a reasonable retainer ($3,000 – $10,000) to ensure the parties are serious sellers and will work towards a speedy close.
What Do Business Brokers Do?
Business Brokers primarily sell smaller companies that are commonly income replacement for the owner. These types of businesses are often sold to an individual buyer and therefore are valued on a basis of Seller’s Discretionary Earnings (“SDE”) rather than using EBITDA.
The level of marketing is typically simpler in nature and tends to involve more one-off negotiations with individual buyers. Business brokers may advertise to prospective buyers on your behalf but, compared to investment banks and M&A Advisors, this is minimal and relies more on incoming interest vs outgoing connections. Often times these efforts are more of a passive process where the broker lists their deals on a website and reactively respond to inquiries.
If external financing is needed, the buyer is responsible for making his own arrangements.
What Are Typical Business Broker Fees?
Business brokers typically function like real estate brokers and get paid only a success fee, so if you don’t complete a sale there is no charge. Because of this, they may be working with a number of businesses at the same time since they can’t be sure that any one business will sell.
It’s common to see business brokers charge 8% – 10% of the final sale price as a success fee. The reason this amount seems high as a percentage is because, due to the smaller size of companies they work with, they need to charge a higher percentage in order to hit an absolute dollar amount that makes the effort worth their time.
For example, if your business is sells for $400,000, then a broker would need 10% in order to make $40,000. And although $40,000 may seem like a lot of money, this amount often covers numerous months, or even years, of work along with various costs throughout the process.
Other common pricing methods for business brokers includes the Lehman Formula, the Double Lehman, the Double Percentage Lehman (“Modern Lehman”) or some modified variation. The reason for the sliding scale is so the broker is ensured to get sufficient compensation for their efforts, but not to charge the highest percentage on the entire amount.
Using an intermediary helps remove emotion and provide objectivity into the process. They allow you to focus on your business, to keep it running at a high level until final sale, the importance of which is discussed in chapter 6. They can help create marketing materials, handle communication with interested parties and help you understand which offers are fair given the current market environment.
In addition, intermediaries can help protect the identity of the seller and ensure that all information is kept confidential at all times. Finally, even if they aren’t directly involved with negotiations, intermediaries can help create a level of competitiveness among buyers without impacting your relationship with any of the parties.
Selling a business can be difficult, time-consuming, and frustrating. Before you take the plunge, prepare yourself by reading our 70+ page ebook, The Ultimate Guide on Selling Your Business. Still have questions about selling your business? You can contact us here.