Tuesday, April 18, 2006


For the past 20 years you have built your business. Your company has become part of your identity. Even when you are not at work, you are working, thinking, planning. You never stop. If you sell you are leaving behind much more than a job. In this article we will discuss some signs that might indicate that it is time to exit your business.

1. Late in your working life you are faced with a major capital requirement in order for your company to maintain its competitive position.
2. A large competitor is taking market share away from you at an accelerating pace.
3. Your legacy systems, production capabilities, or competitive advantage has been "leap frogged" by a smaller, nimble, entrepreneurial firm.
4. A major company in a related industry just acquired a direct competitor.
5. Your fire to compete at your top level is not burning as brightly as it once did.
6. Your kids are not interested or are not capable of running the business.
7. You have had a health scare and have decided to smell the flowers.
8. You have lost a major client of a key employee.
9. The market is hot and you decide to take some chips off the table for asset diversification.
10. You exit in an orderly fashion and from a position of strength as you intended.

Monday, April 10, 2006

Business Broker Red Flags - Summary

Our industry is misunderstood at the lower end of the market. The fortune 1000 companies would not consider a capital event without engaging an investment banking firm. Smaller companies seeking a sale need the same kind of services, but with a fee structure that is more size appropriate.
When I see a couple of firms with a powerful marketing reach engaging in practices that hurt our industry, it ticks me off. Most of the firms that service the lower end of the market are hardworking, honorable people seeking to provide excellent value. Many of these firms are members of the International Business Brokers Association, IBBA. This organization sets standards for business practices and ethical behavior. They also have established an industry certification, the CBI, Certified Business Intermediary.
So as you consider the company you want to engage to sell your business, he is what you look for:
1. No big up-front fees, but monthly fees.
2. No promises of foreign buyers for companies under $30 million.
3. A period of exclusivity from 12 to 24 months, not 5 years.
4. A firm that actively sells your company using direct calling into targeted buyers, and not simply posting on business for sale Web Sites and mass mailings.
5. A firm that tracks and reports their sales progress to you bi-weekly with a status or pipeline report.
6. A firm that is a member of a professional association like IBBA or M&A Source or a local or regional business broker network like MBBI.
7. A firm that at the appropriate time will introduce you telephonically to two of their reference clients whose business they successfully sold.
8. A firm that has a principal that has passed their industry testing and has been issued a CBI designation.
9. An Advisory firm that has experience selling companies in your industry and understands who the targeted buyers are, the right contact, and the industry nomenclature. Finally they should understand your industry's unique valuation metrics and deal structures.
This is the most important contractor or vendor you will ever hire for your business. Your economic future depends on the success of this engagement. Think of other major purchase decisions you have made for your company. Be every bit as rigorous in making your selection of an M&A advisor.

Industry Specialization Can be Important

The final issue I would like to discuss, I would not call an official red flag, but maybe a "nice to have." Have you sold any companies in my industry? Sometimes, your business is unique and there has not been much M&A activity and you will have to weigh other factors more heavily. The advantages in using business broker or merger and acquisition firm that has industry experience are that it both speeds up the sale process and it increases the likelihood of a completed transaction. An M&A firm that has your industry experience will already have their database of potential buyers established. They know the right contact person and these prospects know them and actually take their calls. This alone can reduce the sales cycle by as much as 90 days. Another big advantage of industry experience is your advisor will understand valuation multiples and deal structures unique to your industry. That can be invaluable when the buyer is attempting to grind down your selling price. Industry credibility is very important when your advisor gets the CEO of a targeted buyer on the phone and has exactly 30 seconds to establish buyer interest. It really helps if you speak his language. Our clients in information technology and healthcare have found industry specialization to be of significant value.

Business Sell Side Engagement - Up-Front Fees

Selecting a business broker or an M&A firm to represent your company for sale can be a confusing and difficult process. This posts one of the potential pitfalls.

Last week I got a call from a business owner who had decided to sell his business. He and his partners were beginning the beauty contest phase of selecting a firm to represent them in the sale. His partners had begun discussions with a merger and acquisition advisory firm. He had followed up with this firm prior to calling us and had questioned them on several issues. He shared his findings with me and asked my opinion. Generally I subscribe to my old IBM training and will not disparage a competitor, however, some of the answers were alarming to me so I elected not to withhold my opinions.

The first red flag was that this competitor required a large up-front engagement fee. I certainly have no problem with Merrill Lynch or Goldman Sachs charging their up front fees to their fortune 1000 clients. These firms are a proven commodity with a proven process. Their clients feel confident that a liquidity event will result from their work. A monthly fee is a more accommodating approach for smaller clients whose cash flow would be strained by a large up-front payment.

We have had many prospective clients approach us after unfortunate experiences with these big up-front fees. In one recent case, we were brought into a holding company who had acquired one of our sell side clients. Another division had engaged an M&A firm to sell one of their subsidiaries. After a $40,000 up-front payment and over four months, not one prospect had been contacted. Another common result for clients of these up-front fee firms is a beautiful, bound, 40-page book of boilerplate compiled by a junior level analyst. Unless this is accompanied by a concerted sales and marketing effort, this book will become a very expensive coffee table book.