The sale of your business represents the culmination of years of sacrifice and hard work. It’s likely to be the most important financial event of your life. Most business owners need expert help to get this right.
The goal is to find the right advisors to prepare your company for sale, market it effectively and negotiate the best deal for you. As in any profession, there are excellent advisors and, unfortunately, there are less-than-excellent advisors. Distinguishing between them is difficult because most business owners only deal with a business intermediary once in their lives. Few owners will have a chance to learn from their mistakes. It’s also difficult to rely on your peers for advice if you’re trying to keep your sale plans confidential. These factors combined with the secrecy that shrouds the investment banking and business brokerage industry means many business owners are at risk of making costly mistakes.
The suggestions below are based on Venture 7’s 120+ combined years of experience launching, building, selling, buying and investing in privately held companies. We’ve hired, fired, collaborated with and negotiated against bankers and brokers of all kinds. We’ve seen the good, the bad and the downright scary.
Some of our suggestions run counter to established industry practices - for good reason. Not all of the “conventional wisdom” in the business intermediary industry is designed to provide business owners with optimum outcomes. Some industry practices have been perpetuated to serve the bankers and brokers themselves rather than the business owners they purport to serve. With that in mind, here are the characteristics we've come to value.
1) Marketing and sales skills.
When business owners think about selling their business, they often consider the financial, accounting and legal aspects of the process the most daunting. Most bankers and brokers come from these backgrounds and those skills are important to determining the valuation of your company and for structuring a deal. But remember that you are selling your company. And if you do it right, you're selling more than just the sum total of its assets and cash flows - you’re selling the strategic value associated with your brand, intellectual property, customer relationships, management team and more. So look for an advisor who understands the elements of value beyond just what your financial statements say, and look for people with sophisticated sales and marketing skills to represent your company to potential buyers.
2) Entrepreneurial experience.
Find an advisor who understands what it means to build a company from nothing, nurture its growth through adversity and sell it successfully. A career banker or broker can witness hundreds of transactions and still never really understand what it’s like for an entrepreneur to sell a company that has been their passion and identity for so long. Selling a company is one of the most emotionally challenging decisions an owner ever makes. An M&A advisor who understands this life transition from personal experience can improve your personal and financial outcome.
3) Big company experience.
A maximum value strategic sale is likely to be made to a company much larger than yours. Make sure your advisor has experience dealing with large companies. Navigating the organizational structures of large corporations is very different from working with individual investors or owners of small and mid-sized companies. Don’t isolate yourself from the largest and most lucrative potential buyers by working with an intermediary who has spent their career dealing with small companies.
Selling a company is a team event. Successfully selling a company requires a wide range of skills including sales, marketing, accounting, finance, project management, negotiating and more. It’s virtually impossible for an individual to master them all. Look for an advisor who is well rounded, but who can also bring exceptional specialists to the process. An experienced team is especially important if you hope to sell to a large, strategic buyer who is likely to have their own team of experts on the other side of the negotiating table.
5) Hands-on business owner support.
Many investment banks and business brokers list “consulting” as a service, but in reality they avoid consulting of any depth. Even if they have the skills and experience to provide consulting, they make their money on transaction success fees. They just aren’t set up to do real, hands-on consulting work, and if they do, it tends to be very expensive. As a business owner, knowing what you need to do to increase the value of your business is important, but if you don’t know how to do it or if your existing management team is stretched to the limit, having hands-on support from your M&A advisor can make all the difference in the world.
Traditional bankers and brokers also tend to disappear after the closing. They can tell you, in theory, what life will be like after you sell your company, but it doesn’t always work out exactly as planned. Find an advisor who has actually integrated acquired companies and who can support you and your company long after the closing.
Some M&A Advisory Traditions Need to be Broken
There are many practices that have developed for the convenience and benefit of the investment banks and business brokers at the expense of business owners. When you work with an intermediary, you should be on the lookout for certain behaviors:
1) Beware the cherry pickers.
Some intermediaries reject clients who they view as challenging to sell. Maybe their practices are so strong that they can pick and choose their clients or maybe they just don’t have the creativity and drive necessary to identify every element of strategic value that your company represents, and to secure an optimum outcome for you? Selling strong companies at modest valuation is easy. Look for an M&A advisor who is willing to sell an imperfect company at a fair valuation.
2) Over reliance on financial industry relationships.
Investment banking has long been an “insider's” game with established players sharing deals with other established players. But the internet has significantly leveled the playing field and brought a degree of transparency to the industry. Finding a buyer no longer requires a Wall Street address or membership in the right country club. On the contrary, an over-emphasis on financial industry relationships can undermine your quest for an optimum outcome. There is a great big world of potential buyers out there, and an intermediary who sells a high concentration of companies to private equity investors, for example, might be unwilling or unable to put in the extra effort required to secure a premium valuation with a strategic buyer.
3) Unwillingness to align their financial interest with yours.
Intermediaries will argue that a traditional success fee, based on the “Reverse Lehman Scale” aligns their incentives with yours - that is, the higher the sale price, the more money they make. That is true, but there’s another incentive created by traditional success fees - a fast, low effort, low valuation sale is better than no sale at all. As a result, many intermediaries prefer a fast, “pretty good” transaction to a longer, higher effort deal that might earn them incremental commissions.
The process of researching, approaching, educating and managing a wide pool of potential buyers, and especially strategic buyers, is hard work and it can take twice as long as simply “listing” a company and letting fast-moving financial buyers dominate the sale process. Look for an advisor who understands and accepts this dynamic and is willing to tailor their fee structure to align their interests with yours.
Venture 7: An M&A Advisory For Business Owners, By Business Owners.
You won’t be surprised to learn that Venture 7 Advisors meets all of the above criteria. Indeed, Venture 7 Advisors was created specifically to address many of the shortcomings we have long observed in the traditional Investment Banking and Business Brokerage industries. We are a different kind of M&A Advisory firm that is built from the ground up with business owners in mind. If that appeals to you, please contact us. We would love to learn more about your business and your ownership objectives.