Last month, we examined some ways to increase the value of your company well in advance of an actual transaction. Last Article
Now, you’ve identified your goals, and done all the preparation you can do. How do you retain someone to help you through the sale process?
Should you hire an intermediary?
The first question many business owners have when they are ready to pursue a transaction involving their company is whether they should engage the help of an intermediary or do it themselves.
I am a deal professional, so I am clearly biased toward advising owners that intermediaries are worthwhile investments and can assist in creating value in a transaction.
However, you can go it alone. Many deals are done in the middle market without an intermediary. But, just like you wouldn’t represent yourself in a lawsuit or prepare your company’s taxes, wise owners will want to have help. An experienced M&A advisor can make the process significantly easier to get through and generate significant value.
Simply put, middle market M&A deals are difficult to complete. Many, many factors need to align to get a deal done. Ensuring that you have solid advice on marketing your company for sale and getting a transaction completed is crucial not just to maximizing value, but also to just getting a deal done at all.
In the deal business, I have found that many times, buyers and sellers simply don’t speak the same language. As I discussed last month, entrepreneur owners of businesses often run significantly valuable businesses without the sort of infrastructure or institutional experience that strategic and/or financial buyers are used to seeing. Having an M&A advisor in place can be of great assistance in simply speaking the language.
Additionally, getting a transaction completed will take time – a lot of it. Selling a company can take anywhere from six to 12 months, or longer, and will require countless hours of work and discussions with potential acquirers. Most likely, your time is going to be much better spent running and growing your company rather than selling it. The process will be exhausting; and getting distracted from your company’s success is a dangerous risk to take.
Finally, hiring a competent M&A advisor will create leverage for you in marketing your company that you likely can’t create for yourself. There is a reason that Private Equity firms have large business development groups that work hard to generate proprietary leads. They would much prefer to acquire companies for which they are sole potential purchaser. If you want buyers to compete for your company, you will want to retain an advisor to make that happen.
What type of intermediary should you hire?
Business intermediaries run the range from Business Brokers on the low end to Wall Street Investment Banks on the high end. While they all serve the same purpose, to create a transaction between a willing buyer and a willing seller, they have different business models, payment structures, and experience.
Business Brokers: Business brokers are sometimes called “Main Street Business Brokers” for an obvious reason; they tend to sell the sorts of businesses that you would find along your city’s main streets. These intermediaries tend to represent dozens (or even hundreds) of clients at a time, charge commissions for successful sales, and do most of their marketing via internet sources like www.bizbuysell.com. They are completely appropriate for small, “mom and pop” sorts of businesses that will likely be sold to individual entrepreneurs.
Merger & Acquisition Advisors: M&A Advisory firms tend to be focused on company sales in the middle market. Often, they are staffed by senior professionals with a great deal of experience in transactions around sophisticated sellers that are ultimately sold to either financial (e.g., Private Equity) or strategic acquirers. These intermediaries tend to take a much more individualized approach at client representation and therefore handle only a few clients simultaneously. They often also charge on a commission based approach, but do sometimes charge retainer fees. M&A Advisory firms are a good choice for deals in the $5 million to $100 million expected value range.
Investment Banks: Investment Banks tend to be larger firms that provide a broad array of services, including advisory services, debt raising, capital raising, IPOs, bankruptcy support, and M&A. They are most often staffed by both senior professional and larger staffs of junior professionals. They almost universally charge significant retainers along with a success fee. Investment Banks are excellent choices for large companies (over $100 million in expected value), corporate carve outs, or other more unusual transactions.
Executing a Contract with Your Intermediary
Once you have selected an intermediary, he will undoubtedly ask you to sign a contract that will govern your relationship with him. While there are many forms of these contracts, all will address a number of common issues.
Duration/Exclusivity of Relationship: 12 month exclusive arrangements are fairly common. Because most of an intermediary’s compensation will be earned through a successful transaction, the intermediary will want a significant chance to ensure that he is able to be successful. If you want a shorter, or non-exclusive engagement, don’t be surprised to be asked to pay a retainer fee.
Fee Structure: As described above, intermediary fees are usually some combination of retainers and success fee, depending on the firm’s business model and risk/reward tolerance. Larger reliance on success fees usually means that the intermediary is more aligned with your goals as he will be successful when you are successful. Larger retainers potentially skew this alignment of interests.
Tail Period: While limited in duration, intermediary contracts typically contain a tail period that covers transactions with buyers introduced during the term of the agreementthat occur after the expiration of the contract. These are very typical and appropriate, but be careful to understand what they cover.
Overall, because the intermediary is selling his time and won’t be paid the majority of his expected compensation unless the transaction is complete, the most sensitive issues to the intermediary will be the balancing of risk and reward.
While deals get done without intermediaries on a regular basis, they can and do provide a valuable service that will undoubtedly make a sale process go more smoothly. Hiring the right advisor who’s incentives are aligned with your own is the best way to be successful at this stage.
Next month: Part IV – Marketing Your Company
Michael Schwerdtfeger is a managing director at Chapman Associates. Michael and his team are focused on providing exceptional results through sell-side mergers and acquisitions advisement to entrepreneurs and business owners exclusively. Michael leverages his 20 years of diverse experience handling complex business transactions to help guide his middle-market clients to the best possible deal outcomes.