Have you thought about how you will transition out of your business or who, if anyone, will help you sell it?
These are important questions you should consider one to two years before you are ready to exit your business.
If you have ever Googled “how to sell my business,” you realized very quickly that there are many terms used to describe professionals who are in the business of selling companies. The most common terms used for intermediaries are investment banker, business broker and M&A advisor. It is important that you understand the different qualifications and services provided by each type of transaction professional.
This guide will walk you through the key differentiators of each intermediary, and provide guidance about what to look for in a professional, and what to expect during the sell process. Additionally, you will learn why selling without a transaction professional may be tempting, but could prove to be a costly mistake.
Bulge vs. Boutique
Investment banks are separated into two categories: boutique investment banking firms and bulge bracket firms. Boutique investment banks work with businesses considered to be in the middle market range, usually valued between $10 and $500 million; while bulge bracket firms focus on deals with companies valued greater than $500 million.
Both types of investment banks perform roughly the same sale process. The investment banker will first determine the value of your company through a thorough due diligence process. Once the value is determined the investment banker will begin to market your company through a targeted or broad auction process to find potential buyers. This process normally leads to multiple offers which allows the investment banker to negotiate the best deal for the seller. Keep in mind, this is a high level synopsis of what occurs during the transaction. Along the way, a good investment banker will also coach you in ways to make your business more attractive to buyers and assist you with overcoming unforeseen hurdles during the selling process.
The size of your company may determine whether you hire a boutique investment banking firm or a bulge bracket firm. Either way, you should take time to investigate firms thoroughly before hiring. When hiring a bulge bracket firm, make sure you understand who will actually run your deal. Will it be a senior level or junior level investment banker? This can make a big difference when it comes to negotiating your transaction and providing suitable advice during the transaction process. Boutique investment banks, simply due to the size and nature of the firm, will typically provide senior level support on all transactions.
Qualifications and Licensing
You will also want to research the qualifications and successfully completed transactions of the investment banker. Look at the educational and past professional experience of the investment banker. Prior work experience in the finance industry or entrepreneurial experience affords the investment banker solid skills and knowledge to provide accurate guidance throughout the sale process. Review their accreditations and membership associations. These can provide added skills and a network of connections. You should also research their successfully completed transactions understanding the number and the value of the transactions. This should give you an indication as to whether they are familiar with your industry and have the expertise to close your transaction.
Equally important is understanding the regulatory licenses held by the investment banker. The investment banking profession is regulated by both the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Investment bankers are required to pass the Series 79 Exam also known as the Investment Banking Representative Qualification Examination. This exam “measures the degree to which each candidate possesses the knowledge needed to perform the critical functions of an investment banking representative,” including “advising on or facilitating debt or equity offerings through a private placement or public offering, and advising or facilitating mergers and acquisitions, tender offers, financial restructurings and asset sales.” You can easily determine if a person or firm is licensed through FINRA by going to http://brokercheck.finra.org/ and entering the names.
Once you have vetted the investment banker’s qualifications, you need to determine the trust level you have with this person and their firm. When hiring an investment banker, you are most likely putting your biggest financial asset in their hands. You must be able to speak honestly about your goals and expectations and feel that the investment banker has you and your company’s best interests at heart.
An M&A advisor is a self-designated title individuals use in lieu of investment banker (often when they lack approval by the SEC and FINRA). The individual might have obtained certifications from various associations related to M&A transactions. Some M&A advisors only provide consultative services, providing their clients with strategy and planning advice related to exit planning or liquidity options; while other M&A advisors will execute a complete deal process much like an investment banker.
The key thing to remember when dealing with an M&A advisor is to be sure you know whether or not the M&A advisor is properly licensed to sell a company in your state, especially if your transaction involves securities. And of course, as stated earlier, you must properly evaluate the skills and experience level of anyone you plan to hire to give you guidance about the future of your business.
Business brokers are generally hired to sell smaller businesses valued at less than $5 million, such as restaurants, small manufacturing shops, print shops, etc. The ‘business broker’ most likely has a real estate agent/brokers license. These brokers can only sell the assets of the business, and are not allowed to receive a fee in a stock transaction.
Because small businesses are usually less complex, the process to sell them is fairly simple. A business broker will assist you in establishing an asking price for your business, and typically takes a passive approach to selling the company by listing the company online or in a newspaper. However, some business brokers may have ready contacts and be able to quickly make an introduction. As with selling any business, the time it takes to find a buyer can vary. The fees charged by the business broker are then determined based on a percentage (usually 5-10%) of the sale price of the business.
Once again, before hiring anyone to sell your business, make sure you know their qualifications. Many states require business brokers to have a real estate license. These brokers can only sell the assets of the business, and are not allowed to facilitate a stock transaction. Before embarking on the sale of your business, make sure you understand the rules in your state.
Don't Go it Alone
Although some business owners may be tempted to ‘go it alone’ when selling their business, don’t be fooled by the notion that an investment banker is nothing more than a glorified networker. Studies show business owners who partner with an investment banker to sell their business have better outcomes than those who attempt to sell on their own. In fact, a study entitled Does Hiring M&A Advisors Matter for Private Sellers? conclusively shows that hiring a professional to sell a private company leads to higher deal valuations and better negotiated terms. (The terms ‘M&A advisor’ and ‘investment banker’ are used interchangeably in this study.)
Higher Deal Valuations
Reviewing 4,468 acquisitions of private companies during the period 1980-2010 the authors of this report found, on average, sale price premiums were 27% to 37% greater than transactions for private sellers who did not employ an investment banker.
The report concludes the mere use of an investment banker can drive competition to create more negotiating influence. “Previous studies find that bargaining power is a significant determinant of the magnitude of private company valuations. A key determinant of the seller’s bargaining power is the number of competing bids it receives.”
This deal competition phenomenon occurs even when no real competition exists. According to the study “An M&A advisor can influence the attitude and assumptions of bidders. If a seller only has one strategic buyer interested in purchasing the company, using an M&A advisor can give the prospective buyer the impression that there are competing strategic buyers against which it must compete to acquire the seller.”
Better Negotiated Terms
While the final selling price is important, it isn’t the only factor to be considered. The study points out business owners who use investment bankers get better deals for several reasons.
- An investment banker adds credibility to the sell-side of the deal and consequently decreases the buyer’s sense of control over the deal.
- An investment banker can see synergies from prospective buyers and negotiate higher valuations.
- An investment banker can advocate for the seller and negotiate higher valuations.
While the urge to go it alone and forego the fees charged by investment bankers may be strong, the added value an investment banker brings to the deal far outweighs the expense. Consider the following ways an investment banker adds value:
- Identifies a pool of potential strategic buyers
- Provides a valuation analysis
- Offers suggestions for increasing the value of the business
- Helps evaluate the reasonableness of offers
- Manages the auction process
Many business brokers and M&A advisors are not regulated or required to be licensed. Each state has different regulations regarding the qualifications to sell a company. Only investment bankers are allowed to represent companies in all 50 states due to their federal oversight.
With so much at stake, hiring the right professional to sell your business is essential. Take time to know the professionals and what they can offer you. Hiring the right professional at the right time can help you determine steps to take to shore up your company in advance of selling your business so that you are in the best position to realize the most profitable outcome when you do sell.
Transaction Professional Quick Reference Guide