November 23, 2021
I’ve written about this many times over the years – what to look for in a firm before signing an engagement agreement to sell a privately held business. Even so, I’ve lost count the amount of folks that I’ve talked to that for one reason, or another didn’t know what defined a good firm when it came time to select who would represent them in their business exit.
I want to go over what I believe a business owner should know when selecting a business broker, transaction advisor, investment banker (for this conversation we’ll use those terms interchangeably, and it mostly depends on the size of your business which one applies to you.) in this case, they all mean the same thing which is the firm or the individual you’re going to work with to help you sell your business.
I believe regardless of the size of your business there are six things to consider when selecting that firm or individual. They are alignment, processes, personnel, cultural fit, transparent fee structure, and confidentiality.
Alignment – At GaP, we start every advisory engagement with a valuation of the business to make sure we are in alignment on what the business is worth and what we think the buying community will pay for it and what we think they can go into the financial markets and borrow to make the transaction happen. At the end of that process, you need to consider the business model used by your transaction advisor. Most firms have a business model, and a lot of times advisory business models aren’t in harmony with your own business model. A broker might charge fees and hourly rates where they are financially rewarded regardless of whether they achieve your goal. In the real estate business model, the agent isn’t financially rewarded until they achieve the sale of the property. So, it’s important to understand the business model of the firm you’re working with and make sure it’s in alignment with your personal goals.
Next thing to think about is processes; processes are important to make sure the things that are important to you are also important to your transaction advisor. Things like key personnel, finances, the legacy of a business all play a part when selling. An advisor with the right processes will find a buyer that is respectful of those goals. Processes for us are everything because we know they drive successful results. In my Insights Newsletter, The Right Process Produces Desired Results, I walk through the critical processes required for better than good results. As noted above, we start every transaction relationship with a valuation. This gives clarity and alignment between what your business is worth, what buyers will pay for it and what they’ll be able to go into the financial markets to borrow. Next in the process is putting together marketing materials, putting together buyer lists, going out live and confidentially talking about the business and then getting letters of intent and several different offers for evaluation – all those happen at specific points, in very intentional ways and those are processes we know work. A crucial point to keep in mind about processes is to make sure control stays in your camp. You don’t ever want control to get over into the buyer’s camp and when you start analyzing the business model and processes of many business brokers, you’ll find they sometimes lack control. Their processes are not very tight, and that injects the risk of not keeping your aims in focus.
Next thing is Personnel - a lot of business brokers will be a one-, two- or three-person shop, and in those businesses, somebody is going to wear 5 or 6 hats at any given time. There are so many things to consider apart from just signing you up. Can they market your business effectively? Can they list the business, vet potential buyers, set up financing, work out the details of the deal? Are they equipped to deal with legal, inventory, equipment appraisal, and leased property? We just think that one person can’t be fantastic in all those different areas. When it comes to personnel you want to make sure the firm you choose to align with has processes and those process levers are pulled by individuals who are experts in that area. The more experts that exist under the same roof of that firm the more alignment you’re going to have with them and that reduces risk in the deal for you.
There’s also a cultural fit aspect to this journey. If you don’t feel comfortable with the people in the firm, don’t sign up with them. There is usually a bunch of fine print on the back of the engagement agreement and that fine print gives the firm exclusivity to act on your behalf. You don’t want to sign up and get exclusive with someone you don’t trust. Red flags might be not returning your calls, they don’t respond to your emails, or they’re somebody that tells you what they think you want to hear but doesn’t listen to what your actual goals are and can’t craft a process to achieve them. You really need to think about the cultural fit before you sign any engagement agreements or offer retainers. I often hear that people have buyers’ remorse after engaging because they didn’t feel like there was a fit. When you sign up, you’re locked in for 24 to 36 months with that advisory firm, so you want to make sure they’re the right fit for you and for achieving your goals.
Along with alignment, processes, personnel, and cultural fit, it’s important to keep in mind that the firm is a for profit entity. You should know up front how they make their money, so fee structure transparency is critical. Is their profit dependent on you achieving your goal or do they make a profit regardless of achieving them? Unfortunately, that happens a lot in this business. You want to make sure the financial arrangement is fair and there’s alignment – that your goal is going to be achieved. Everybody needs to keep the lights on! Its fine to ask for a retainer and, some charges along the way are customary, but if a firm is not asking for that up front that might be a flag you want to raise. If you have somebody that wants all their fees up front or half up front and half at a certain time – that’s not customary. What’s customary in this business is to have a retainer and some fees. There will be some third-party expenses they’ll need to cover, but the bulk of the earnings for the advisor shouldn’t come until your goal is achieved and it should be very plainly spelled out in the engagement agreement.
Lastly, I want to mention Confidentiality – you don’t want that to be an afterthought. Confidentiality plays a huge role to most business owners who don’t want their key employees, customers, vendors, suppliers, landlords, or people in the community to know they are thinking about selling their business. Tipping their hat too early takes a lot of leverage away from the business owners. It also makes the work force, customer base, suppliers, and vendors nervous because they don’t know who the buyer will be. Will the new boss be as good as the old boss? Are they going to come in and change all the rules? All these uncertainties don’t need to come into play with an advisor who sets up processes that make your confidentiality paramount. There will be non-circumvent agreements, non-disclosure agreements, and other agreements that will ensure any buyer who looks under the hood of your business is acting in a professional way. They’ve already been vetted and there’s a higher degree of probability that your private decision doesn’t get out to parties that you don’t want included.
In summary, before you sign up with a firm you want to make sure you have alignment with that firm. You want to make sure the firm has very defined processes. They need to have the personnel in-house with the necessary knowledge in the critical areas of a deal. Trust is a key factor in identifying cultural fit since you will be committed to this firm for a very long time. A transparent fee structure that is fair is presented to you up front and finally, confidentiality. Whenever a business owner takes these things into consideration, they almost exclusively enjoy a positive engagement that provides the results they expect and achieve the goals they have for selling their business.