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:
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.