Investment Banking Method - How to Successfully Sell Your Business

Investment Banking Method - How to Successfully Sell Your Business

Matt Gilbert

September 27, 2021

If you run an established privately-held business, there are numerous ways you could go about selling your company. Countless studies have documented a 75+% failure rate with all of them except one – this blog focuses on the one method that consistently delivers the greatest odds of success (95+% in our experience). What is the method, you ask? The Investment Banking method of Seller Representation!

Most people think of Investment Banking as only being available to exceptionally large businesses with hundreds of millions or even billions in revenue. Most are unaware that those same processes are available in modified programs to much smaller, privately-held businesses with revenues falling between $10M-$100M. If you own a privately-held business with revenues in this window – this blog is for you!

As a veteran of M&A (my first transaction experience was in 1987), I’m going to make this simple and easy. Following is the exact formula for selling your business at its peak price to a buyer who embraces the culture and personnel you’ve assembled with deal terms that are most often a win-win for all involved. There have been a few times when we skipped steps in the process - or modified it - and even been coerced into running an anti-process. 100% of the time, when we allowed our client to convince us to skip or change the process, we regretted it and the deal results were subpar. Today, we insist on our proven processes, or we simply decline the engagement. Staying disciplined has elevated our practice immeasurably and provided our clients winning exits time after time. The Investment Banking method should include the following:

Interview sell-side M&A specialists: You must find the right sell-side specialist! The right one will be someone who spends all their efforts collaborating with sellers. This specialist needs to hear, understand, and articulate back to you what you are trying to accomplish. If you aren’t quite sure of your objectives, they can help you dial them in. Too many M&A people or firms want to shove every deal through the same process funnel (a process that’s designed for their best outcome – not yours). Your mission is to find that rare person or firm with whom you connect and with whom you can build trust. This person/firm should be a true seller representation specialist who has the capacity in their schedule and resource pool and who can be focused on tailoring a process to deliver your vision. Don’t settle! The number one variable between success and failure, between an average sale and an amazing exit, is which transaction quarterback you choose. I cannot stress this enough – average people and firms will deliver average results. You deserve the best! Take the time to find it.

Submit yourself and your business (separately) to transaction readiness assessments: If your transaction advisor doesn’t do this, keep looking. You haven’t found the best advisor yet. It’s vitally important to know for sure that you’re ready, and when you are, the business must also be ready. No one wants to spend 6 months to a year working on a process and negotiating with an acquirer only to have the owner get cold feet at the altar. And surprises with the business never bode well. The best advisors will help ensure that both the entity and the individual are ready for the scrutiny of due diligence. Sidenote: If you stumble in this step, there’s no need to proceed. Get this right before you move forward into the sale process.

Get a fair market valuation: There’s no point putting in the mountain of work required to market the business if your opinion of value and “the market’s” opinion of value don’t line up. You aren’t going to persuade a buyer to come around to an inflated opinion of value when they must defend their opinion of the value of your business to lenders, attorneys, CPAs, operating partners, consultants, and many more who will challenge them on their opinion. Sell your business when your opinion of value aligns with the market’s opinion. How will you know? Get an M&A Valuation.Tip: Make sure the valuation is a “fair market” valuation that considers comparable sales and the credit markets. Many valuations are for other purposes and won’t help much in a business sale.

Hire the best Investment Banker you can find: Note, “the best” isn’t the slickest marketer, the cheapest perceived fee structure, or the one with the most recognized name. It’s the one who will put their “A Team” on your assignment, who takes the time to understand your goals intimately and then designs a process to achieve them, and who aligns their financial interests with yours to ensure everyone is rowing in the same direction. The best Investment Banker for you is the one with whom you can trust with every intimate detail of your worklife and financial situation. They’ll be well connected to top M&A attorneys, tax accountants, wealth advisors, and other professionals you may need in the process. The Investment Banker is your quarterback. The sale process is your super-bowl. Your fate rests on the performance of their team. Align with the right Investment Banker for your personal situation. Period.

Make deal preparation, deal defense, data-room population, and marketing material development a priority: A great Investment Banker is only as good as the weakest link in the chain – and unfortunately, that weak link is often the client. Sometimes clients don’t put enough weight on just how vital they are to supplying the deal team with all the information required to run the sale process at the highest level. The transfer of data and information that only the seller has must be thorough and accurate. Once live marketing begins and the seller reverts to focusing on running the business, the Investment Banker will focus on running the process.

The marketing process is critical: If maintaining confidentiality is important to you and you prefer employees, vendors, customers, and other people not know all your business details, you need a marketing process that provides the best odds of privacy. Most business brokers will plaster “listings” on their websites, on MLS websites, in trade publications, etc. While they generally try to keep the listings generic, unintended consequences often happen because of this shotgun approach. An Investment Banker on the other hand, will run an invitation-only process. They will spend the time and effort to curate lists of high-probability prospective buyers. They have processes in place for signing Confidentiality Agreements, Non-Circumvent Agreements and Non-Disclosure Agreements prior to sharing information. They vet buyer prospects for the ability to close a sizable transaction. They deal with professional staff who know and respect the ins & outs of the confidentiality process. Again, for the best outcome, you need to align with an Investment Banker who has the best processes, the best checks & balances, and who takes your privacy seriously.

Run your business better than you ever have while you’re in the sale process: Show prospective buyers through company performance why top dollar is warranted. Show them how you and your team have set the next owner up for another level of success. Find the energy and passion to empower your company. Highlight areas in which the next owner can invest to grow, streamline, or reduce risk. Doing this may encourage buyers to stretch the purchase price they are willing to pay. It will also help you transition the business in such a way that they can be successful, and your employees, customers, vendors, and others can, too. That’s how positive legacies are created!

Representations and warranties are important: How do I know? Well, there’s a big insurance industry around this, and insurance is a highly profitable business. My advice - take this seriously - is to divulge what you know to your deal team so they can figure out the best way to inform the buyer without thwarting the deal. Be thorough. If the buyer wants to hold back a large escrow for covering potential surprises, then consider a reps & warranties tail policy. Use it as a negotiating tool. Often with a good policy, escrow is reduced to the deductible of the policy. Bring in professionals to help you understand your options.

Be prepared for due diligence: I’ve heard many buyers say, divorce negotiations and even fighting the IRS were emotionally easier than the due diligence process! But it is an unavoidable part of the process required to get a 7- or 8-figure check out of a buyer and their sources of financing. If you choose the right Investment Banker, they will prepare you and the business for this moment in incremental steps from the beginning. Most buyers will hire big outside accounting and legal firms to audit your systems, processes, books, inventory, real estate, equipment, environmental history and practices, and so much more. Be ready to endure about 45-60 days of digging for information and answering detailed questions. You cannot successfully close without passing through this gauntlet of fire. Just handle yourself gracefully and know that it’ll be worth it once you’ve closed.

Negotiating the finer points: Your Investment Banker is your hired gun. They know the landscape and they know how to maximize your deal. They’re also there to be the tough negotiator. Often, sale requirements include training and transition periods where the seller and buyer work alongside one another. Other times, the process of rolling equity creates future partnerships. It’s far easier to enter these relationships with the buffer of an Investment Banker taking and shooting arrows in the negotiation process. Something that never gets headlines, yet always swings 7 figures into or out of your pocket; is negotiating the finer details. A partial list might include:

  • Working capital
  • Retainage
  • Agreed inventory value
  • Tax treatment of various components of compensation
  • Earn-outs
  • Seller notes
  • Rolled equity
  • Prepaid expenses and deposits
  • Accruals
  • Cash and cash-like financial instruments
  • Obsolete equipment, parts, or materials

A great Investment Banker knows to negotiate these variables in the final days leading up to closing, and their efforts can easily swing big money into or out of your pocket.

Closing: As mentioned in the opening paragraph, selling a privately-held business for top dollar to a great successor is a feat that beats the odds. Should you make it to this point, congratulations are in order! I wholeheartedly suggest you take a moment to thank God, celebrate your success, and commemorate the occasion!

If you’re like most of our clients, you can’t afford not to heed these recommendations. I wish you all the best as you embark into this chapter of your business. It can be the most rewarding moment or the most haunting. – Align with the best, and you’ll increase your odds of success immeasurably!

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If any of this resonates with you, we encourage you to take our Sellability Assessment and talk with us to see if your business makes the cut as one who can still command a great exit in this M&A environment. We will be in touch quickly to discuss the results. Click here to take the assessment.

Gilbert & Pardue Business Advisors (GaP) is a Houston-based business advisory firm serving lower middle market and middle market business owners from coast to coast through representation for Mergers & Acquisitions (M&A).

Matt Gilbert and Bret Pardue established GaP to provide owners of lower middle market and middle market businesses – those businesses generally enjoying annual revenue of $10-$75 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle markets provides the quality of representation and transactional expertise that we do.

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