Imagine this common scenario for many business owners today…You have spent the better part of your life building your business through hard work, determination, and a little luck. Now, your company has grown into a well-known, highly respected business and a formidable competitor in the industry. You have made a pretty good living for yourself and your family through the success of the business. Now, you are starting to think about the prospects of selling it so that you can spend more time with your grandchildren and just generally have a chance to have fun. You are not sure what the business is worth, but you have an idea at what price you would sell.Then, the call comes. A company in a similar industry calls to inform you that they have been watching your company over the last few years and are impressed with its product mix and brand name recognition. They are interested in buying your business.You think to yourself: “I built this business by myself. I know the industry. I have negotiated with vendors and customers all my life. I should certainly be able to negotiate the sale of my business by myself. It can’t be that hard.”

The above scenario (or some version of it) often occurs with companies considered to be in the lower-tier of the middle-market ($5 million – $200 million revenues). It is common for business owners to get serious about exit strategies only after a potential buyer comes knocking on the door.

At Mercer Capital, we see this frequently, because often times the first thing a business owner does after he gets an offer is call us to obtain an appraisal. Business owners usually tell us that they have an idea what the business is worth or even what they would take for it, but want a professional appraiser to “verify” their assumptions.

Fear is the underlying motivation bringing the business owner into our office — fear of leaving money on the table, or never knowing, with some degree of certainty, if he got the best deal possible. After investing a life’s work growing this valuable asset, which probably comprises the majority of his (and his family’s) net worth, it would be a shame not to realize its maximum value.

Unfortunately for the business owner who takes this route, an appraisal is not the appropriate tool to prevent his fears from becoming a reality. He needs a professional M&A intermediary to help him sell his business. We have seen business owners shortchange themselves by taking the “For Sale by Owner” (FSBO) approach. Sure, they managed to sell their business, but did they get the best price and terms? It’s hard to say without entertaining multiple competing offers. Even if the offer is, in the owner’s mind, a good one; is it the best one?

Objections to using an intermediary usually relate to the fee associated with hiring an investment banker. But is the fee that onerous?

Consider the following analogy:

You are trying to sell your car for $10,000. Someone offers to wash it and tune it up and then do all the work to sell it for you and the only up front cost is to purchase the soap. The individual only wants to be paid after the car is sold and for a percentage of sales price above $10,000.

You don’t have to be a seasoned entrepreneur to know that’s a pretty good deal.

An M&A intermediary is compensated in the same manner. The cost for soap in our scenario is essentially the intermediary’s retainer fee. The intermediary “cleans up” the company by presenting the business in the most favorable way, making necessary adjustments to uncover value. The intermediary will work to convince prospective buyers to pay for that value. The incremental increase in deal price that an intermediary can create is often many times that of the fee charged. It is essentially a “zero-cost” service to the client.

Because Mercer Capital has served both as an intermediary for clients or provided appraisals for clients who chose to go it alone, we have witnessed the outcomes of both strategies. Accordingly, we have compiled a list of warnings for those who venture down the FSBO road:

• Negotiating with only one potential buyer = lower price. A fundamental economic truth: the more buyers sitting at the bargaining table, the higher the price. If the buyer believes that he is the only one at the table, the seller is in a position of weakness. However, with multiple offers in a competitive bidding situation, the seller will know what the market will truly pay for the business. As a FSBO, it is extremely difficult to allocate the time to seek other offers. In our experience, once a FSBO owner has an interested buyer, he pours all his time into closing the deal with that party. If it doesn’t work out, he looks for the next potential buyer. One of the critical roles of an intermediary is to create competition that will drive up deal price. Often, even the introduction of an intermediary into the negotiation process creates a sense of competition. Facilitating a competitive bidding process is a full-time task that is best left to the professionals.
• The buyer wants to harvest the “low-hanging fruit”. In a recent post on the Buyout Blog (www.buyoutblog.com), author Tom O’Neill calls the profit enhancements made after a middle market business is acquired “low-hanging fruit”. He speaks directly to how often owners of lower-tier middle-market businesses leave this money on the table when they sell their business. Professional acquirers, like private equity funds or other corporations, are routinely able to add 10 to 25% to the bottom line the first year of ownership just by harvesting this “low-hanging fruit”. An intermediary should be able to recognize that low-hanging fruit and demand that his client be compensated for it. Through a clear and concise presentation of the business and its financial data, the intermediary can create a sound argument to the buyer for any profit enhancement the buyer should expect to capture. As a FSBO, it may be difficult to identify, or at least present, a strong argument for being compensated for that value.
• Driving a deal takes a great deal of time. Do you have that time? If the marketing process is managed correctly, a good business will have multiple parties interested. Each potential buyer will have different questions at different times, which will consume a great deal of the business owner’s attention. It is also difficult to manage the information to guarantee a high level of confidentiality. Coordinating due diligence visits and other similar meetings demands an exorbitant amount of time and energy that the seller may not be able to afford.
• Business owners are not necessarily good negotiators. Many find themselves getting emotionally involved and losing a degree of rationality and objectivity. If a critical eye is cast on the business by the prospective buyer, it is possible that the seller could take it personally, leading to stalled negotiations or heightened tension between both parties.
• Do you know how to manage the information flow? Do you know when should you get a confidentiality agreement? What about an exclusivity agreement? How much information should you share? What if the buyer is a competitor? What is a reasonable time frame for due diligence? If the seller doesn’t know what is reasonable, it may send a signal to the buyer that the seller is naïve. Many experienced buyers will offer to lead the seller through the process if they feel the seller is uninformed. This puts the seller at a disadvantage, and sellers often find themselves agreeing to things that may not be in their best interest. An intermediary will know what is reasonable and will handle all of these details.
• Financial statements and brochures are not adequate for presentation. Typically, when a business owner begins negotiations with an interested buyer, he will provide the financial audits for the last few years and the latest marketing slicks. Often, this information can create more questions than provide answers, and answering these questions will require the business owner’s time and attention. An intermediary will know what a buyer is looking for and will present the business in a format that will expedite the process and position the business in the best light possible. The intermediary will have studied the company and questioned the seller about one-time charges, excess or discretionary expenses and non-operational items that should be adjusted. He will also consider, in the case of a corporate buyer, what synergistic cost savings the buyer should see and account for.
• Watch out for “tire-kickers.” We have seen FSBO sellers waste a ridiculous amount of time on “tire-kickers”, buyers who are not serious about a transaction or may not have the financial capacity to transact. We often have clients call us out of sheer frustration, because they provided private information, spent time in due diligence, and wasted hours at the negotiating table; all to have the deal die because the buyers couldn’t get the financing to transact. An intermediary will perform the necessary due diligence on any prospective buyers to prevent this situation from occurring.
• CPAs and attorneys are not intermediaries. While both parties play a key role in selling a business, we believe (and they would likely agree) neither professional has the experience or capacity to serve as an intermediary. Like a general contractor pulls together the skills of the electrician, plumber and painter, the intermediary works with the business’s accountants and attorneys to pull together the necessary information to get the deal closed.
• Negotiating with your “new boss” is not a good idea. It is common for a buyer to expect the former owner to work in the business for a few months up to several years to ensure business continuity. Occasionally, there is an earn-out provision that provides the seller with an incentive to continue to successfully grow the company. In this situation, it makes life difficult if animosity was created between the buyer and the seller through the negotiation of the deal. It is possible that tension will be carried over from the negotiations into the new working relationship, causing problems for everyone involved. We have found it best when the intermediary serves as the hardball negotiator. It is helpful, should the seller stay with the business, when the seller can default to the advice of the intermediary. Most intermediaries don’t mind being stern in their client’s best interest.
• Selling a business can take a great deal of time – at the expense of running the business. FSBO sellers always underestimate the time commitment involved with selling their business. Forget about multiple buyers (which we have established is in the seller’s best interest), but dealing with just one prospect requires a great deal of time and effort. Invariably, the operations of the business will be adversely affected. In a self-defeating manner, the FSBO process will only lengthen the time and increase the cost to get to closure.

The disposition of your life’s work is nothing to be taken lightly. You owe it to yourself and the company’s shareholders to consult a professional when considering the sale of your business. Perhaps Mark Twain put it best in his book, Following the Equator, when he remarked:

“There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can”.

If you are contemplating the sale of your business, remember these words and contact an intermediary to help you avoid the perils of FSBO. The professionals of Mercer Capital do more than provide business appraisals. We are regularly engaged to act as intermediaries. If you have been approached by a potential acquirer, give me a call at 800.769.0697 to discuss your situation in confidence. When it counts, count on the experience and expertise of Mercer Capital.

Reprinted from Mercer Capital’s Transaction Advisor Vol. 9, No. 2, 2006.

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