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Talking with Owners: Misconceptions About Selling Your Company

Many business owners have misconceptions about selling their company. I have learned these twelve common misconceptions from my 26 years of M&A (mergers and acquisitions) experience as: 1) Vice President of M&A for two large publicly held companies, 2) Managing Director of a nationwide M&A advisory firm and 3) now as President of TIGER Brokerage Group. Commonly the sale of the company is the biggest financial decision an owner makes. Consequently, a mistake made in selling the company can be very expensive but can be avoided.

 

Misconception #1: I only need one buyer.

You really do not want to simply find that one strategic buyer. A strategic buyer is someone in the same or similar business. Actually having one buyer is the worst situation. There is an expression that “one buyer is no buyer”. You want to create a market of buyers interested in your company. You want to have a number of buyers competing to acquire. You need to know your BATNA (Best Alternative to Negotiated Agreement). If you have someone make an offer out of the blue (without your shopping), you have no BATNA and no idea if the offer is fair. This is one of the principles taught at the Harvard Center for Negotiations.

Misconception #2: I want a “short and easy” process.

It requires a large number of contacts to have a successful process of selling a company. It is very much a numbers game. Having more contacts means bettering the chances of having multiple interested buyers. A percentage of those contacted will sign the Non Disclosure Agreement (NDA), a document designed to protect the owner. Another percentage of those will still be interested after reading the Descriptive Offering Report (book). Only a small percentage will actually schedule a showing of the company. A percentage of these potential buyers might make an offer. After reaching an oral agreement, only a percentage actually come together on a written legal agreement, and a percentage of these actually close. If you sell quickly and easily, you have left money on the table without doubt.

Misconception #3: Just show me the money.

Actually terms are more important than price. The highest offer but with bad terms can be a terrible deal. It may have seller financing and/or an earn out component of consideration. The terms can have the seller assuming a lot of risk. You might think that if you get one billion dollars for your company, it is a great deal. One dollar per year paid over one billion years is not a good deal!

Misconception #4: I need an Investment Banker.

At the upper end of the spectrum of advisors are investment banking firms. Goldman Sachs is an investment banking firm. They are geared for helping big public firms and charge large fees. Many investment bankers have business degrees from prestigious schools. Using a Harvard MBA does not necessarily improve the odds of selling your company. Owners of small and midsized companies should look for professionals that don’t just have academic degrees but have industry credentials like CBI (Certified Business Intermediary), CM&AA (Certified Mergers and Acquisition Advisors), and/or M&AMI (Mergers and Acquisition Master Intermediary).

Misconception #5: I will save money by using a business broker (versus an intermediary or investment banker.)

At the bottom of the spectrum of advisors are the business brokerage firms. Business brokers sell smaller companies on “Main Street”. Many come from commercial real estate or accounting backgrounds. Their process is usually that of real estate agents. They have a large number of listings and advertise to get interested buyers into their office to show their various listings. Commonly their buyers are primarily looking to “buy a job” for themselves. Advertising is local, and buyers are usually local. Most companies listed by business brokers have a published ask price, like the practice that is used in real estate. Frequently, there is no “book” ( Offering Memorandum or Descriptive Offering Report) prepared for interested buyers, and no nationwide search is performed. Confidentiality is not as much of a concern with business brokers. Many business brokers try to pass themselves off as middle market intermediaries to get the larger commission from the sale of larger companies. Most business brokers charge a higher percentage then that of an intermediary working the mid market. A midsized company should work with the appropriate advisor, which is a middle market intermediary at an M&A advisory firm.

Misconception #6: I have to have an advisor to sell my company who “understands my business”.

In reality as an M&A advisor in transaction, I have found that having sold another company in that specific SIC is not really that much of a benefit for subsequent listings. It still requires the same amount of work and contacting potential buyers. There is some efficiency in having already researched some industry statistics – but that is a relatively minor aspect compared to all of the effort the advisor still has to do to be successful. Even having the first hand knowledge of who is an interested buyer (from the previous listing) doesn’t really help much because the advisor (intermediary, middleman or business broker) would contact them anyway. With our approach, every business is unique and requires customized attention. The intermediary does not need to know how to run their client’s company but does need to know how to sell the company.

Misconception #7: I should use an M&A advisory firm with a large number of professionals and/or multiple offices.

Some sellers might think that the larger number of people and/or offices increases their likelihood of actually selling. Most of the time, this concept is not true. The other brokers do not really help to sell the company – as it isn’t their listing. Actually, not only is there no benefit with a larger firm, but some business owners come to find out that there is a loss in confidentiality when their sensitive information gets distributed around the firm or to other offices. The owner is better off with a single advisor who works hard, has an extensive data base, controls the process, and maintains confidentiality.

Misconception #8: It is better to work with an M&A advisory firm with an internal team of specialists .

Many of the larger firms have different professionals doing different parts of the deal. A salesman might get the listing, another staffer might write the “book”, while a third person with more extensive business experience talks with potential buyers. This segmentation of activities results in no one individual at the M&A firm being held responsible. Also there are some items that get dropped, as your deal moves through various hands. The owner is better off working with an intermediary who works the deal all the way through and takes responsibility.

Misconception #9 The fast talking and smooth saleman will be successful in getting my deal done.

Talk is cheap. Some advisory firms really like the advising (versus the “doing”). Advice is nice, but what an owner needs is the actual selling of a company. Consulting, valuations, preparing offering books are all required, but are of no real value if the M&A advisory firm is not primarily focused on selling the company. Selling skills and negotiating skills are required, but are only part of many aspects of a professional intermediary.

Misconception #10 “I can sell it for you”.

Many owners are told by their various professionals who they currently utilize (CPA, lawyer, etc.) that they can sell the company for the owner. Lots of people “dabble” in M&A by trying to do an M&A transaction. On the surface, it looks to them like an easy way to possibly earn a big fee. Just because a CPA knows your financials doesn’t mean you should give him the chance to sell your company. It may be “shop worn” when you later decide you need a real M&A intermediary. Selling a company should not be a sideline to someone’s main activity.

Misconception #11: The broker that I will use is the one that thinks my firm is worth more.

Don’t make your decision about an intermediary primarily on the price he thinks that he can get for your company. Frequently in real estate brokerage, it is the “biggest liar” who wins. Business brokers/intermediaries need to be able to sell the company by themselves. They can’t rely on anyone else finding the buyer (as co-brokering is commonly the case in real estate). Therefore, it doesn’t do any good for a business broker or intermediary to inflate the value to get the listing. Frankly, it doesn’t make any difference what price a broker thinks he can get for your company. The buyer’s perception of the value is the only value that counts.

Misconception #12: I can save money in selling a company myself.

Taking this approach will inevitably cost you. This is not the time to go “cheap”. Besides the old expression, “you get what you pay for”, this transaction has an incredible impact on rest of the owner’s quality of life. Many owners only sell a company once. As it is a large financial transaction, there is a lot at risk. You need a team of professionals with proper incentives to be successful. In fact, you might be able to sell the company by yourself (i.e. without a middleman). This is called “going naked”. Even if you do sell it without paying a commission, you probably are making a mistake. I virtually never work on an assignment where my proven value isn’t higher than my fee. An M&A intermediary provides a great return for the investment.