Why You Should Hire a Business Broker and Advisor for M&A
Do you really need a advisor? The short answer is "absolutely not." Many entrepreneurs reached their position by being mavericks - bold and courageous independent individuals who took risks and ventured beyond their immediate sphere of understanding. Because this is the case, many entrepreneurs believe they are capable of learning just about anything when it comes to business sales, marketing and even M&A. However, the intent of this article is not to tell you that you can't or even shouldn't act as your own M&A advisor. The intent is to open your eyes to some of the reasons why it may be advisable to use a professional brokerage firm when selling your business.
Perceived cost savings
Deciding whether it is the right time to sell or whether you should accept an offer is a difficult decision to make. However, once the decision to sell is made, you are faced with an even more daunting, but also much more important question. Should you handle the sale yourself or should you hire a sell-side M&A advisor?
Many business owners make the mistake of choosing the former. Usually, two factors drive such a decision: the idea that it will save them time and, more often than not, money. Our recommendation is that even if you are approached by a potential buyer, you should not try to steer a sale yourself. What you lose in money to pay a professional seller, you gain back in other ways in most cases. We explain this below.
Advisors enhance value
When you enter into a sales negotiation, one of the most important factors you need to ensure is that your company, the business you have put your blood, sweat and tears into, is valued properly and most importantly, fairly. An accurate and fair business valuation will help you determine the best selling price. Best is a relative term, as both the buyer and the seller want to get the best selling price. In our opinion, the best price is where both parties are satisfied. There are several common methods to determine this price (see Value a business for more on this). If you are not an expert at fixing a car engine, seek out a mechanic, why go at valuation alone? Valuation is a skill that analysts have mastered their entire professional lives. More than that, valuation is an art, not a science. There is no specific manual for your company. If you don't have experience valuing and negotiating deal points, such as working capital, excluded assets, or discount rates, you may and most likely will underestimate your valuation. This is more common if your potential buyer has hired a consultant, as you are now in negotiations with an expert.
Consultants bring clarity to murky waters
Murky waters can be navigated by most experienced business people. If you are in a position to sell your business, you are most likely experienced in business and an expert in your field. Hiring a consultant makes the process more efficient. Ensuring an efficient sales process is almost as important a factor as obtaining an accurate and fair sales price. Experienced consultants and advisors know the most common pitfalls, where time is wasted and where deals are likely to fail. This knowledge can ensure not only that the deal actually moves forward, but also that the sale goes through quickly. The faster the contract is signed, the less time your buyer has to change their mind. Although your life is all about your business, your potential buyer has a lot of fish in the sea. Besides, who wants to spend a year, or surprisingly often more, of their life trying to get an M&A deal done?
Some common pitfalls
This list is not exhaustive and is not intended to replace a consultant. We are simply providing a list of common mistakes you may stumble upon. If your consultant has not discussed these with you, check to see if they have explored them.
1) Focusing on one potential buyer. If you are approached by someone who triggers your desire to sell your business, the prudent response is to look around the market now. Typically, the business owner knows someone who is interested and focuses on them rather than confidently approaching a larger pool of potential acquirers. This can paralyze you, as your only prospect may change their mind or offer you something you're not happy with.
2) Sloppy marketing. What surprises us the most is that companies with large marketing budgets for customers try to save on marketing material when they decide to sell. Isn’t this the reason you go into business in the first place? You need to spend money here, developing unique and targeted marketing materials for differnt types of buyers.
3) Due Diligence. Failing to walk your potential buyer through the thorough due diligence requirements can lead to a failed deal. From our experience, the most important step that is missed here is communication.
A poor track record for Do it yourself
Business owners negotiating a deal are often in the midst of a difficult sales process and eventually see the deal fall through. There are usually no second chances with this buyer, and a failed deal sends negative signals to the market. However, not getting the deal done is not the only way to fail. The deal can happen, but at a very low multiplier. We often see a final purchase price far below what was justified and wonder why the owners sold themselves so short.
Keep the focus on your business
Do you have a year to focus on this, or is your time better spent drumming up business? Instead of turning your back on your business to navigate the sales process, which you most likely know very little about, hiring an experienced consultant can help you focus on the most important thing that will add value to your sale: Your business. Consistent sales growth is your most important asset, and a drop in sales while you focus on selling will ultimately result in less money. When it's the right time to sell your business, you'll know it will feel right. If you decide to sell your business, make a smart decision and hire an experienced sell-side consultant.
Is Business Brokerage one of your Core Competencies?
Perhaps you have owned several businesses and have gone through the process of buying and selling businesses previously. This would mean that brokering a business, as you may try to do in the future, is "old hat" to you. You have the experience and know enough to do damage. That may be true for a few business owners, but those types of people seem to be rare. For most, their business was their obsession and they may not have had time to develop greater skills beyond their specific business.
If this is the case, using a merger and acquisition professional is probably a very good idea.
Can you get top money for your business?
Business owners often know what it cost to build their business. And after going through an extensive business valuation process, they know what their business is worth on paper. Even if the owner was able to create a meaningful prospectus on their own, that doesn't mean they will be able to get top money. It is interesting to note that sometimes - due to pride issues - business owners are unwilling to get help putting their business on the market for sale. This may be the best decision you will ever make. Think for a minute about the fees for selling the business. Typically, there is a monthly "retainer" required that is paid periodically until the business is sold. There is also a commission structure that can range from 10% to 3% of the sale price of the business, depending on the type, size and nature of the transaction. Faced with these fees associated with brokering the deal, many companies balk, thinking, "I'll just save some money." This is generally unwise.
Most brokerage firms, at least the reputable ones, can usually get more out of your business than you were originally able to and make up the difference when you sell the business. This also doesn't take into account the fact that you didn't have to spend the time to put the business up for sale yourself (i.e., preparing the marketing and financial documents, contacting potential buyers, and marketing the business in myriad other ways).
Contacting a merger specialist is not only in your best interest to reduce stress, but also to get a return on your investment.
Do you have the time?
Even if you know your stuff and have the wherewithal to sell your business to the right industry leader looking to acquire a business like yours, do you really have the time? Most, if not all, entrepreneurs are very driven, motivated and busy individuals whose lives are filled with tasks, projects, meetings and strategy implementation. Any good entrepreneur knows how to focus on their own core competencies and outsource the rest. In the end, trying to go it alone may prove "penny wise and pound foolish."
So you can definitely sell your own business. That is definitely an option. However, if you do, keep the above questions in mind. If you answered "no" to all three questions, you should consult with a business broker and M&A expert. If you feel you have the time, energy and knowledge to do it yourself, go for it. Not many business owners do this, but for those who are able, it can be a great idea to sell their business yourself without using a broker.
For those who are not able, it may be wise to leave it at that and use a broker.