As a Business Intermediary here in CT and NY that works with many Business Brokers and M&A (Merger & Acquisition) Advisors, I feel it necessary to disclose the fact that Princeton Capital is successful because business owners select Business Brokers and M&A Intermediaries to help them sell their businesses. I am writing this objectively, which is how we operate, which can be seen by the multiple times we steer business owners from our firm toward other professionals, when we feel someone else can add more value.
To anwer the question...The fact is that most businesses are not sold by business brokers or M&A (Merger & Acquisition) intermediaries. Most are sold by owners because a buyer happened to knock on their door at the right time. When they seek help in selling their businesses, most small business owners turn to their trusted advisors. For obvious reasons, small business owners rarely have a business broker or M&A intermediary as one of their advisors. (A recent study showed that Accountants are the most trusted advisors of the Small to Medium sized, or Middle-Market, business owner.) The decision to sell your business is a very important one, if not the most important professional decision a business owner will make. Should you use someone to help you? Which professional should the business owner use to sell their business? Can they trust a complete outsider to do what is in their best interest?
In my experience I have found that in most situations, (certainly not every circumstance), the business owner's accountant or attorney will offer to be the lead, and basically orchestrate the transaction. They obviously want to do what is in the best interest of their clients, and probably do not understand the value that an intermediary will provide. They might not have relationships with a lot of intermediaries, and might not fully understand the process that led to the closing. In addition, the fee looks extremely attractive. Whereas they typically have more experience with their trade than the typical business broker or intermediary, most accountants and attorneys do not have the overall skill to get the most value for a business.
I feel the largest value we add to our clients comes from areas where a typical accountant or attorney does not have the experieince or expertise, and therefore "short changes" the business owners. Those two areas are in the areas of marketing, and running a controlled auction.
There are so many potential buyers for any particular business. The intermediary or Business Broker earns his fee by looking at buyers that are outside of the "usual suspects". Strategic Buyers will certainly pay more for a business, but are their strategic buyers outside of your industry peers? What is the true value of your business? Is it in your customer base? Distribution Channel? Intellectual Property? Employees? In addition, Where are the best places to find those buyers? The list is endless. The intermediary can discover and articulate the true value of your business, and market that value to a broad audience to get the highest offers.
Running a controlled auction is extremely difficult, but arguably the most valuable service we provide our clients. Creating a competitive environment for a company, whereas buyers understand that if they do not provide an offer with sufficieint value, the company will go to another buyer, is essential. This is not easy to do, and contains many pitfalls that can be fatal to the deal.
Therefore you would like soemone to help you who is an expert at marketing, negotiating, and orchestrating the sale. It costs money, but if that intermediary can get you 20-30% more for your company it is well worth it. And the right intermediary will be able to do just that.
The reason our business started is due to the incredible inefficiencies involved in business transfers. No matter how you intend to leave your business, one way or another every business owner will eventually leave. But, according to a 2007 Mass Mutual survey, nearly a third of business owners do not have an exit plan. A PriceWaterhouseCoopers survey said 43% of their respondents had done little or no exit planning. This lack of planning will certainly leave money “on the table”, but it does not end there. Everyone from employees, customers, vendors etc are better served by a smooth business transition. This issue is problematic since it will increase over time; the first Baby Boomers turned 63 this year, and many of them are small business owners.
The most popular exit strategy according the PWC study was “Sale to Another Company”. According to Tom West, 20% of the 5.5 million businesses under $10 million in annual sales are for sale each year, and less than 25% actually sell.
Although there are many alternatives to selling to another company, for the purposes of this article we would like to focus on what business owners should be doing now in order to make their businesses more valuable to a buyer. These tips should help you run your business more successfully, and increase the likelihood of a sale, even if that sale is 5-15 years in the future.
1) Systems Sell – Most small businesses purchased are bought by investors or owners who are seeking a reliable cashflow. Systems that are recorded, tracked, and proven give the prospective buyer confidence the business will continue to run smoothly, and therefore reduce the risk. This makes a business much more attractive and valuable to a larger group of buyers. This is why proven franchises such as a McDonalds sell for a high premium. Systems can cover everything from marketing, hiring, developing, service, etc. If you begin to track and record your systems now, your business will be much more valuable later.
2) Employees – If your business is all about you, it is not worth much at all. That translates to a significant amount of risk for the buyer. In addition, if the success of your company depends up a couple of key employees, there is a tremendous amount of risk. The goal is to make yourself as insignificant to the future of the company as possible. In addition, you need to make sure your employees are incented to stay with the company for the foreseeable future. This can be done with monetary or stock bonus plans, or something as simple as a non-compete agreement, or employee contract.
3) Tax Strategies – We are not qualified to offer tax advice, but we can say we have seen an astonishing difference between the taxes paid on very similar businesses simply due to some pre-planning. There are too many strategies to list here, but suffice it to say you need to get qualified advice from someone who specializes in business transitions. Think about what a 10-20% difference means to you when you sell your business.
4) Customers – Most businesses are their customers. If you have a diverse base of loyal customers, your business will be much easier to sell. If you are like most businesses, you have a high concentration of your revenue coming from a handful of customers. You need to come up with ways to put those customers on annual contracts, or long term incentive plans. In addition, try to get more revenue from your smaller customers. Can you introduce new products?
5) Revenue – Bar none, companies with higher revenue are more likely to sell, and more valuable. Statistically, revenue is even more important than the profit percentage. Do whatever you can to get your business to the next revenue level. The levels we use are $1 million, $5 million, and $20 million. After realizing those revenue numbers, your company will be significantly more valuable, and saleable, than under those numbers.
Ok - talking about the benefits of hiring a Business Broker is self-serving - I admit it. But, it is important that folks understand the value Business Brokers in CT and NY bring to the table.
"Strategic advice, first of all, has become broader than actually doing the deal" - Lazard chairman and CEO Bruce Wasserstein
I just got off the phone with a small business owner in Connecticut, who has owned his business in CT for over 20 years. He is very well networked within his industry, and knows who the likely buyers are for his business. He is a savvy businessman, with a lot of "deal" experience.
He wants to know why he should have to pay a business broker anything, no less the substantial fee most brokers charge. "Where is my ROI on that type of fee?", he asks. Of course, that is a very legitimate question.
The common perception is that you really only need a Business Brokers to find the right buyer. Whereas that may be the case in certain circumstances, it is not the case with most of the deals we work on. Princeton Capital certainly works hard in scouring the market for a buyer that will offer the highest price for a given company, don't get me wrong, but we add a substantial amount of value beyond that.
But, what good is finding the right buyer if the deal does not ultimately come to fruition? How do you keep the buyer "honest" without getting a competing offer? Suppose you find a buyer willing to pay 10% more for a company, but the owner winds up paying 15% more in taxes? How much does it cost if the process takes 4 months versus the process taking 12 months?
In most "post-sale" studies I have seen, successful sellers have attested to the point made above. The planning for the sale, "hound-dogging" the deal process. quarterbacking the communications between the professionals, and advising on how various deal structures can effect the seller personally are all the major benefits of using a Business Broker.
