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Article added or updated:
03/30/2008 |
SELLING YOUR BUSINESS – WHY USE A BUSINESS BROKER
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08/07/05
By David M. Kauppi, CBI, President Mid Market Capital
Perhaps the most important business transaction you will ever pursue is
the sale of your business. Many business owners attempt to do it
themselves and when asked if they got a good deal, many respond with “I
think so,” or “I got my asking price,” or “I really don’t know,” or “It
was a disaster.” Often times these very capable business people approach
the sale of their business with less formality than in the sale of a
home. The purpose of this article is to answer the questions – Why would
I use a business broker and what am I getting for the fees I will pay?
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1. Confidentiality. If an owner tries to sell his own business, that
process alone reveals to the world that his business is for sale.
Employees, customers, suppliers, and bankers all get nervous and
competitors get predatory. The business broker protects the identity of
the company he represents for sale with a process designed to contact
only owner approved buyers with a blind profile – a document describing
the company without revealing its identity. In order for the buyer to
gain access to any sensitive information he must sign a confidentiality
agreement. That generally eliminates the tire kickers and deters
behaviors detrimental to the seller’s business
2. Business Continuity. Selling a business is a full time job. The
business owner is already performing multiple functions instrumental to
the success of his business. By taking on the load of selling his
business, many of those essential functions will get less attention,
sometimes causing irreparable damage to the business. The owner must
maintain focus on running his business at its full potential while it is
being sold.
3. Time to Close. Since the business broker’s function is to sell the
business, he has a much better chance of closing a transaction faster
than the owner. The faster the sale, the lower the risk of business
erosion, customer defection, employee problems and predatory
competition.
4. Large Universe of Buyers. Business brokers subscribe to databases of
businesses that enable them to screen for buyers that are in a certain
SIC Code and have revenues that would support the potential acquisition.
In addition they maintain databases of high net worth individual buyers
and have access to private equity groups databases that outline their
buying criteria.
5. Marketing. A business broker can help present the business in its
best light to maximize selling price. He understands how to recast
financials to recognize the EBITDA potential post acquisition. Higher
EBITDA = higher selling price. He understands the key value drivers for
buyers and can help the owner identify changes that translate into
enhanced selling price.
6. Valuation Knowledge. The value of a business is far more difficult to
ascertain than the value of a house. Every business is unique and has
hundreds of variables that effect value. Business brokers have access to
business transaction databases, but those should be used as guidelines
or reference points. The best way for a business owner to truly feel
comfortable that he got the best deal is to have several financially
viable parties bidding for his business. An industry database may
indicate the value of your business based on certain valuation
multiples, but the market provides the real answer. An industry
database, for example, can not put a value to a particular buyer on a
key customer relationship or a proprietary technology. Most business
owners that act as their own business broker get only one buyer involved
– either another business that approaches him with an unsolicited offer
or a referral from his banker, accountant, or outside attorney. Just
look at the additional billion plus dollars of value created for MCI
shareholders because of the competitive bidding between Verison and
Quest Communications.
7. Balance of Experience. Most corporate buyers have acquired multiple
businesses while sellers usually have only one sale. In one situation we
represented a first-time seller being pursued by a buyer with 26
previous acquisitions. Buyers want the lowest price and the most
favorable terms. The inexperienced seller will be negotiating in the
dark. To every term and condition in the buyer’s favor the buyer will
respond with, “that is standard practice” or “that is the market” or
“this is how we did it in ten other deals.” By engaging a business
broker the seller has an advocate with a similar experience base to help
preserve the seller’s transaction value and structure.
8. Maximize the Value of Seller’s Outside Professionals. Business
brokers can save the seller significantly on professional hourly fees by
managing several important functions leading up to contract. His
compensation is usually comprised of a reasonable monthly fee plus a
success fee that is a percentage of the transaction value. The business
broker and seller negotiate with the buyer the business terms of the
transaction (sale price, down payment, seller financing, etc.) prior to
turning the purchase agreement over to outside counsel for legal review.
In the absence of the business broker that sometimes-exhaustive
negotiation process would default to the outside attorney. It is not his
area of expertise and could result in significant hourly fees.
9. Maintain Buyer – Seller Relationship. The sale of a business is an
emotional process and can become contentious. The business broker acts
as a buffer between the buyer and seller. This not only improves the
likelihood of the transaction closing, but helps preserve a healthy
buyer – seller relationship post closing. Often buyers want sellers to
have a portion of their transaction value contingent on the successful
performance of the company post closing. Buyer and seller need to be on
the same team after closing.
Our experiences with businesses that engaged our firm as a result of an
unsolicited offer from a buyer have been quite instructive. The eventual
selling price averaged over 20% higher than the first offer. In no case
was the business sold at the initial price. To conclude, the business
broker helps reduce the risk of business erosion with improved
confidentiality while allowing the owner to focus on running the
business. The business broker led sale helps maximize sales proceeds by
involving a large universe of buyers in a competitive bidding process.
Finally, the business broker can improve the likelihood that the sale
closes by buffering buyer – seller negotiations and by balancing the
experience scales.
Dave Kauppi is business broker with Mid Market
Capital, Inc. MMC is a business broker and merger and acquisition firm
specializing in providing intermediary services to entrepreneurs and
middle market corporate clients in a variety of industries. The firm
counsels clients in the areas of merger and acquisition, divestitures,
succession planning, valuations, and exit planning. Contact Dave
Kauppi at (630) 325-0123, email davekauppi@midmarkcap.com or visit our
Web page
www.midmarkcap.com.
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