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 of the number of folks I’ve talked to who ‘didn’t know what defined a good firm’ when the time came for them to select a firm to 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, or investment banker. In this blog, I’ll use those terms interchangeably as they all refer to the same thing – the firm or individual a business owner will work with to sell the business. (For each deal, size of the company typically determines which one applies.)
I believe that regardless of the size of your business, there are 6 things to consider when selecting that firm or individual. They are: alignment, process, 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 with the seller on what the business is worth and what we think the buying community will pay for it. This figure must also be in alignment with what a buyer can borrow in the financial markets to make the transaction happen. It is important to consider the business model under which a transaction advisor operates. Often, the business model an advisor employs isn’t in harmony with a seller’s business model. For instance, some brokers charge fees and hourly rates in order to ensure they are financially rewarded regardless of whether they achieve the seller’s goal. At the opposite end of the spectrum – in the ‘real estate business model,’ a broker isn’t financially rewarded until completion of the business sale. So, it’s important for a business owner to understand an advisor’s business model to make sure it’s in alignment with their own expectations.
PROCESS: Processes are designed to make sure that things that are important to a seller are also important to the transaction advisor. Things like treatment of key personnel, financial outcomes, and the company’s legacy all play a part when selling. An advisor with the right processes will find a buyer that respects those goals and is in harmony with them. Processes at GaP are everything because we know they drive results. In my Insights Newsletter, The Right Process Produces Desired Results, I walk through the critical processes required for outperforming a seller’s goals. As noted above, we start every transaction relationship with a valuation. This gives clarity and alignment between what a business is worth, what buyers will pay for it, and what they can borrow in the financial markets. Next steps in our process include creating marketing (offering) materials, putting together buyer lists, developing price-defense strategies, and inviting prospective buyers into the process to confidentially learn about the business. These steps culminate with getting letter of intent offers for the seller to evaluate. Each step happens at a specific point and in very intentional ways to drive a predetermined outcome. A crucial point to keep in mind about any transaction advisor’s processes is that they should always be designed to make sure control stays in the seller’s camp. The processes used by many business brokers lack the key element of control and often cause control to flip to the buyer’s camp. When an advisor’s processes aren’t very tight, it elevates the risk of losing focus on the seller’s goals.
PERSONNEL: A lot of business brokers will be a one-, two-, or three-person shop, and in those firms, somebody is going to wear 5-6 hats at any given time. There are so many critical tasks to undertake apart from just signing up the seller as a client. Can they frame the offering correctly? Will they market effectively? Can they vet potential buyers, evaluate forms of financing, and work out all the crucial details of the deal? Are they equipped to negotiate legal matters, inventory issues, equipment appraisals, and the nuances of owned/leased property? We believe strongly that one person can’t be fantastic in all those different areas of expertise. When it comes to a transaction advisor’s personnel, a seller should make sure that these individuals are experts in each discipline required to defend valuation and achieve the seller’s goals. The more experts that exist under the same roof, the greater the likelihood a transaction will be successful.
CULTURAL FIT: There’s also a cultural fit aspect to this journey. Business owners should not sign up with a firm unless they have a level of comfort with the folks who will be working on their deal. In any engagement agreement, there is usually a bunch of fine print giving the firm exclusivity to act on the seller’s behalf. Trust is paramount! Red flags might be not returning calls, not responding to emails, or saying what they think the seller wants to hear instead of listening to the seller articulate his or her actual goals. I often hear sellers express remorse after engaging an advisory firm because they didn’t realize the fit was off. Once executed, engagement agreements typically lock in a seller with that advisory firm for 24-36 months. Understanding cultural fit up front is critical!
TRANSPARENT FEE STRUCTURE: It’s important to keep in mind that any transaction advisory firm is a for-profit entity. A seller should learn up front just how they make their money, so fee structure transparency is critical. Is their profit dependent on achieving the seller’s goals, or do they make a profit regardless of achieving them? Unfortunately, failing to achieve the seller’s goals happens a lot in this business. All parties need to keep their lights on to ensure that the financial arrangement aligns with achieving the seller’s goals. For instance, it’s typical for a firm to ask for a retainer to cover some expenses along the way. Receiving a retainer will motivate the firm to give this deal their full attention and commitment. However, if an advisory firm requires half or all their fees up front, that’s not customary or wise for a seller to agree to. What’s customary is to have a retainer, some third-party reimbursable expenses, and a success fee for achieving the seller’s goals. A seller can keep alignment with an advisor by ensuring that the bulk of the advisor’s earnings only come when the seller’s goals are achieved. That formula should be very plainly spelled out in the engagement agreement.
CONFIDENTIALITY: This is critical to success and shouldn’t be an afterthought. Confidentiality plays a huge role to most business owners who want to control when key employees, customers, vendors, suppliers, landlords, or people in the community know they are selling their business. Tipping the hat too early takes a great deal of leverage away from the business owner. It also makes the workforce, 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? Will the quality of products or services remain high? Will I still be paid on time? All of these uncertainties shouldn’t come into play with an advisor who sets up processes that keep confidentiality paramount. A good advisor will utilize legal instruments such as non-circumvent agreements, non-disclosure agreements, and other documents to ensure that any potential buyer who looks under the hood of the company is required to act in a professional way. Prospective buyers should be vetted by an advisor so that there is a high degree of probability that the private news of a potential business sale doesn’t get out until the seller is ready to make the announcement.
In summary, before signing up with a transaction advisory or brokerage firm:
· Ensure alignment
· Look for tightly-defined processes
· Evaluate personnel for in-house expertise necessary for successful deal negotiation
· Gauge cultural fit and along with trust and confidence for the long haul
· Understand fee structure
· Consider confidentiality round out the list.
Whenever business owners keep these things top of mind as they choose a transaction advisor, they almost always enjoy a positive engagement that produces their desired results for selling their business.