Chapter 16
Who Are the Deal Makers?
Many of us grew up watching Sesame Street on TV and singing one of their songs with the lyrics, “Who are the people in your neighborhood?”17 We just didn’t realize they were giving us career guidance! There will be professionals on both sides of the deal that you will want to be familiar with. When you’re selling your business, it’s important to understand the roles these different people play and how they can assist you with your sale. Small business owners hesitate to reach out for professional help because they don’t want to incur the fees these professionals will charge, but these professionals make their living putting deals together, getting them closed, and earning their keep. The work they do and the services they provide are closely aligned with your needs, so this may not be the time for you to think about cutting corners.
Finding Professional Help
Of course, some people do put a “For Sale by Owner” sign in the front window, hope for the best, and try to sell their business on their own. Obviously, this is not the recommended approach! You have industry contacts and acquaintances who clearly like your business—at least try to get more than one offer! If you are a “go it alone” type of business owner—“I don’t see the benefit of paying someone else”—then you are accepting the risk and ready to put in the effort needed to make a sale. Some people have the experience and are equipped to take on this task. I certainly hope the information contained in the previous chapters helps you achieve your goal.
Maybe this is all new to you, but you decided to go ahead and sell the business to your cousin Jake, or you have taken the offer from one of your former competitors. The draw to get to the beach as soon as possible can be strong! Occasionally sellers are heard saying,
“I didn’t need a broker to sell my business. I cut a deal to sell my business with someone I already knew in the business (a competitor, a vendor, a relative).”
Keep this in mind: What these sellers don’t realize is that, by trying to save on the brokerage commission, they risk undervaluing their business and may leave money on the table. They also risk exposing their business to a strategic buyer that may have been using this as an opportunity to see how the competition works, never intending to close the deal. The fees professionals charge are often negotiable. It’s a highly competitive industry so it pays to shop around. Be sure to look closely at the different services they provide. Now that you understand the sales process, be sure their services align with those you will need. Before you take a risk by deciding to cut them out, at least take the time to find out what the cost will be.
Sometimes, penny-wise owners even outsmart themselves, but the principal rarely benefits when there is no intermediary in a negotiation. That doesn’t mean that you shouldn’t look for a buyer who is already working in your industry. Finding someone already in the industry is a good thing. Putting someone between you and them in the negotiation is a better thing.
The principal rarely benefits when there is no intermediary in a negotiation.
By employing professional help, you are employing someone experienced with the business sales process because it is their full-time job—they know the game. You are employing someone who will act as an intermediary to help negotiate the deal for you. While you may only sell a business once or twice in your life, they are familiar with the complex sales process.
An experienced professional may already have a contact list of people who are buying similar businesses, particularly if they specialize in an industry, and they may be able to quickly advise you about how difficult or easy the sale of your business may be and what buyers in your industry are most interested in.
“I already have a list of investors looking for SaaS software development businesses.”
You will need to decide who is best to act as your sales agent and intermediary for the sale. In general, you need to consider hiring either a business broker or an investment banker.
Business Brokers
A “business broker” is a licensed professional who works with business owners to assist in the sale of their business. Licensing requirements for business brokers vary from state to state. They are usually self-employed sales agents who work through a brokerage and are paid a commission that is a percentage of the sale. They are success oriented because they are on commission. Business brokers often specialize in certain industries (restaurants, retail, technology, etc.), so it is important to ask questions about previous sales and commissions.
“What industries have you sold into before?”
“How much (in dollars) have you sold over the last three years?”
In general, a business broker can help in determining a fair price for the business, ensuring the business’s finances and financial records are in order, preparing marketing materials, negotiating a price, going through escrow, and closing the sale. Business brokers not only manage these steps, but also ensure confidentiality by requiring interested buyers to agree not to disclose the details of the potential business sale. Business brokers work to put a deal together and act as intermediaries for the sale.
Investment Bankers
Investment bankers also act as intermediaries in the sale of a business. The role of an investment banker however is often misunderstood. The primary role of investment bankers is that of a financial advisor to the capital markets. They help corporations raise funds for many reasons, such as for capital expansion projects, and they assist corporations with mergers and acquisitions—which is what draws them into the business sales process. They perform these functions by providing financial advice and by acting as fund raisers. They can provide the same services as a business broker and additionally are licensed to handle many more activities, including private stock offerings, placements, and equity financing; they are also licensed to underwrite deals (manage stock sales and transfers). Investment bankers therefore are licensed to provide a much wider range of services than a business broker and must be FINRA certified.18
Investment bankers are often involved in situations where larger corporations are merging (rolling up) many smaller businesses. For this reason, it is important to understand what role they are playing in your deal. Are they supporting the buyer or the seller?
You need to approach the fees charged by a professional intermediary with an understanding of your anticipated asking price in mind. It’s easy to justify their fee if they recommend a higher sale price.
Types of Buyers and Investors
Deal makers are on both the sellers’ and the buyers’ side of the deal so it’s important to know who may be sitting next to your buyer on the other side of the deal table. We talked in chapter 5 about some of the general categories of buyers you will look for. Some buyers may be individuals who have just moved to town or have saved for years and are ready to go out on their own. One of your employees or a group of them may even be ready to step up to buy your business. Buyers generally don’t come on their own. They bring partners and financial backers along. Let’s take just a moment to understand who some of the specific types of buyers or backers for those people might be.
Banks
A bank is not going to buy your business, but your buyer is likely to go to a bank for funding. This will be a loan just like the mortgage on your house. In the United States, business loans are often guaranteed by the Small Business Administration (SBA)19 which will put some bureaucratic hurdles in front of your buyer that may take some time to work through. The SBA and the banks put stringent requirements on the business and the individual. To qualify for a loan, it takes the buyer some time (and it will take your patience) to complete the application process. You will be afforded a more complete exit, especially for smaller deals, and following the closing you will be off to the beach.
“I was able to get an SBA guarantee, so I didn’t need to get the seller to accept an earn-out to make the deal.”
Venture Capital Companies
A venture capitalist (VC) is a person who provides equity financing to businesses with high growth potential. The money that a venture capitalist invests in the business is called venture capital. Venture capital firms are generally formed by a group of investors who leverage a money fund to increase their overall buying power. They are business investors whose goal is to acquire a portfolio of businesses with high potential, with the intention of reselling the business in three to five years at a high profit.
Because they plan to leverage your business, they are likely to offer a lower price than a strategic buyer, who intends to hold and grow it. They are more likely to offer you an upside on their eventual sale (paying later rather than sooner) or to offer to purchase only part of your business (51 percent).
“I agreed to sell half my business now and collect the other half in three years at the increased value when they sell.”
Depending on your personal situation and how well you have done positioning your business, a VC might make a lot of sense for you. This is especially true if you wish to remain with the business and manage it for another owner. Anticipate a conversation about the amount of money that will be paid to you in cash, and how much if any you will reinvest into the business (such as to pay down debt). This is also a great place to use the software model described in chapter 13 to play “what if?” and to see what the impact would be if the investor were to put additional capital into the business. How would those funds grow over two to three years, and what would that value be to you at that time?
If a VC company is attracted to your business, it is an indication they see a true upside in its value. VC companies often specialize in industries, so it is possible they know of some event that is expected to increase the value of businesses working in your industry. If this is the case, they may be buying several similar or complementary businesses, hoping to roll them up together with the expectation that the larger business will become worth more than the smaller ones they bought.
Angels
An angel is an investor with the personal resources to purchase your business. Generally, they are interested in buying it as an investment and have no immediate interest in operating it. They may want you to continue to operate the business or they may be backing someone else who is interested in ownership and who will operate the business for them. Finding an angel investor is a great way for a former employee to purchase your business.
Beware of Sharks
There is a popular television show called Shark Tank20 that has created some confusion among small businesses (and start-ups). People love Shark Tank and can imagine themselves taking their newest business start-up idea on the show to sell the idea to their panel. The show has in fact provided a great amount of opportunity for would-be entrepreneurs. The confusion is usually with the show’s name. I have spoken with people looking to buy a business whose comment is,
“I am looking for a shark to help me get going.”
In selling or buying a business a “shark” is someone who will “eat your lunch and then eat you so they can steal your business.” You don’t want to look for sharks—you want to look to avoid them. A shark is someone who offers you a bad deal by undervaluing your business, by offering you bad terms for your deal, or by finding other ways to cheat you. Shark Tank may be a catchy TV name but what you want is a buyer who is an “angel,” not a shark!