Business owners generally have two options when it comes to selling their business – they can sell through an intermediary (investment banker, broker, or another professional advisor) or can sell directly to a buyer. Each route has its pros and cons, depending on the needs and desires of the seller.
Using a Sell Side Advisor
There are several reasons why working with an investment banker or broker might make sense for a business owner. These include if the owner needs:
- Help framing their story: A good investment banker can help business owners create presentation materials and financial models. They will dig through the company’s financials and other information, and determine how to communicate margins, sales, and opportunities.
- A high level of expertise and assistance: Small business owners may not feel like they have the capacity or capabilities to execute a deal on their own. An intermediary can run the process for less sophisticated owners, saving the owner time and energy.
- A wider network of buyers: If a business owner is unsure about who potential buyers of his/her business are, they may want to leverage an intermediary’s rolodex/network. This will allow the seller to reach potential buyers outside of their specific industry.
In summary, an investment banker or broker can help business owners frame the company’s story, save time and energy, and find buyers outside of their network. That said, they are expensive and may not always add enough value when weighed against their cost. Investment bankers and brokers are also compensated based on the size of the transaction that is executed, so may be biased towards advising their clients to take the deal that is the highest value, rather than the right partner – these aren’t always the same depending on the seller’s desires. When hiring an intermediary, it is generally still a good idea to be involved in the process and actively participate in meetings and negotiations with the buyer. Business owners should be transparent in their goals and work to structure a deal that works for both parties.
It is important that owners understand that quality investment bankers tend to focus on businesses with $5m+ EBITDA because their fees are derived from the size of the transaction that they can execute. This fee then comes out of the proceeds that are paid by the buyer to the business owner. For big companies anticipating being acquired in large transactions, hiring an investment banker may be a wise investment. They are sophisticated in positioning businesses for sale, running broad processes to bring in many buyers, and negotiating terms alongside lawyers and other professionals. Investment bankers will also typically help business owners improve and repackage their materials, such as presentations and financial statements. That said, investment bankers can be expensive, and nothing is guaranteed.
Business brokers, like investment banks, aim to help business owners sell their business and take a fee upon success. Relative to investment banks, they are focused on smaller businesses and are cheaper but they’re also less sophisticated. Brokers will typically take seller’s materials and market through their own networks. Much like with investment banks, nothing is guaranteed with a business broker.
Other potentially useful advisors and service providers to consider using include corporate attorneys, CPAs, or wealth advisors. These groups may be able to help sellers with introductions and in assessing options, but selling companies is not their area of expertise.
If an owner knows who the appropriate buyers of their business are and is comfortable representing themselves during negotiation, they can run their own process and save themselves considerable time and money. Selling directly to the acquirer cuts out the middleman and allows an owner to take full control of the sale.
The benefits of selling direct include:
- Saving money: Hiring a quality sell side advisor comes with a steep and potentially complicated fee structure. They usually require a monthly retainer fee (or an upfront/engagement fee) in addition to a success fee at close. The sales process can take 7-10 months to complete, resulting in an expensive engagement.
- Saving time: A sophisticated business owner that has spent a significant amount of time in his/her industry likely has a good idea of the market ecosystem and may know the most logical buyers. If he/she feels comfortable representing him or herself, hiring an investment banker to run a long and drawn out process may not make sense.
- Limiting the number of people digging through their business: Investment bankers shop businesses to numerous buyers, with the aim of increasing the number of bidders. Buyers will get deep into the weeds and request large amounts of detailed information about the business. When a business owner sells directly to an acquirer, they can limit who has access to this information. They can also maintain control over telling their company’s story and framing how it fits with a smaller set of targeted buyers that they know.
In summary, selling the business directly to a buyer will take sophistication and hustle, but may be more efficient and save the owner money.
Before you spend time and money hiring a banker, call us to get a sense for the value of your business and whether you might be a fit for Tide Rock. In partnering with us, business owners avoid being overburdened with debt and gain access to a group that helps create value through strategic planning and operational enhancements. Give us a call to learn more about what a partnership between Tide Rock and your company might look like.
“The team at Tide Rock has been fantastic to work with. They add tremendous value in both strategic thinking as well as tactics. They are there when we need them and allow the management team to operate without micromanaging. I could not ask for a better investor or partner.”
– Peter Heald, CEO, Signature Analytics