Selling a business is one of the most significant decisions an owner will make. For lower middle market companies with $3 million to $20 million in revenue, the stakes are particularly high. The right strategy can maximize the sale price, streamline the process, and help achieve personal and financial goals. This article compares three common approaches to selling a business: doing it yourself, working with a business broker, and hiring an investment banker.
1) Selling a Business Yourself: The DIY Approach
Pros:
- Cost Savings: The most obvious advantage of selling a business yourself is the potential cost savings. By avoiding broker or investment banker fees, you can theoretically keep more of the sale proceeds.
- Full Control: You maintain complete control over the process. From marketing to negotiations, every decision is in your hands.
Cons:
- Time-Consuming: Selling a business is a full-time job. Owners often underestimate the amount of time required to prepare the business for sale, market it, vet potential buyers, and navigate the due diligence process.
- Limited Access to Buyers: Without a network of potential buyers, your reach is limited. This can result in fewer offers, lower offers, or both.
- Lack of Expertise: Most business owners are experts in their industry, not in selling businesses. A lack of experience in M&A can lead to costly mistakes, such as undervaluing the business, wasting time with unqualified buyers or accepting unfavorable deal terms.
- Emotional Involvement: Selling your own business can be an emotional rollercoaster. This emotional involvement can cloud judgment, leading to decisions that are not in your best financial interest.
When to Consider DIY: Selling a business yourself might be worth considering if you have extensive M&A experience, a strong network of potential buyers, and the time and energy to devote to the process. However, for most lower middle market companies, the risks often outweigh the benefits.
2) Selling with a Business Broker
Pros:
- Market Knowledge: A business broker specializes in selling companies like yours. They understand current market conditions, industry trends, and what buyers are looking for, enabling them to price your business competitively.
- Access to Qualified Buyers: Brokers have a network of qualified buyers actively seeking businesses to purchase. This increases the likelihood of multiple offers, driving up the sale price.
- Negotiation Expertise: A broker acts as an intermediary, handling negotiations to secure the best possible deal. Their experience helps navigate complex issues, such as deal structure, earnouts, and seller financing.
- Confidentiality: Maintaining confidentiality is crucial during a sale to avoid disrupting operations or alarming employees, customers, and suppliers. A broker can discreetly market your business while keeping its identity confidential until serious buyers are identified.
- Reduced Stress: Selling a business is stressful, but a broker can shoulder much of the burden, allowing you to focus on running your business until the deal is closed.
Cons:
- Cost: Brokers typically charge a success fee, usually a percentage of the sale price. While this can seem costly, the higher sale price and smoother process often justify the expense.
- Less Control: You will have less control over the sale process compared to a DIY approach. However, a good broker will keep you informed and involve you in key decisions.
When to Consider a Broker: A business broker is often the best choice for lower-middle market companies. They provide the expertise, network, and support necessary to maximize the sale price and ensure a smooth transaction. For most business owners, the broker’s fee is more than offset by the additional value they bring to the transaction.
3) Selling with an Investment Banker
Pros:
- Expertise in Complex Transactions: Investment bankers are highly skilled in managing complex transactions, especially those involving larger companies or multiple stakeholders. They can handle sophisticated deal structures, such as mergers, acquisitions, and leveraged buyouts.
- Broad Network of Buyers: Investment bankers have access to a wide network of strategic and financial buyers, including private equity firms, corporations, and institutional investors.
- High Valuation Potential: Investment bankers are adept at positioning businesses to achieve the highest possible valuation, particularly when there is strategic value for a buyer. They often use competitive bidding processes to drive up the sale price.
Cons:
- High Costs: Investment bankers typically charge higher fees than brokers, often including a retainer plus a success fee. For smaller deals, these costs can be prohibitive.
- Focus on Larger Deals: Investment bankers generally focus on larger transactions. If your business is on the lower end of the $3 million to $20 million revenue range, you may not receive the same level of attention as larger clients.
- Less Personalized Service: Due to their focus on larger deals, investment bankers may offer less personalized service compared to a business broker, who is more accustomed to working closely with business owners in the lower middle market.
When to Consider an Investment Banker: An investment banker may be the right choice if your business is at the higher end of the revenue spectrum, has significant growth potential, or is likely to attract strategic buyers. However, for many lower middle market companies, the high costs and less personalized service might not be justified.
Case Studies: Real-World Examples
DIY Sale Case Study: The Challenge of Going It Alone
Consider the example of John, a small business owner who ran a profitable digital marketing agency with $4 million in annual revenue. Confident in his industry knowledge and eager to save on fees, John decided to sell the business himself. He listed the business online and reached out to a few contacts he believed might be interested.
After six months, John had only received a handful of inquiries, none of which led to serious negotiations. The buyers he did engage with offered far less than he had anticipated, citing concerns about the company’s reliance on a few key clients. John realized he had underestimated the complexities of valuing his business and presenting it to the right buyers. In the end, John accepted an offer that was significantly below market value, simply because he was eager to move on.
Key Takeaway: Selling a business yourself can lead to a lower sale price, especially if you lack access to a broad network of buyers and the expertise to negotiate effectively.
Broker-Assisted Sale Case Study: Maximizing Value Through Expertise
Mary owned a software development firm with $5 million in annual revenue. Aware of the complexities involved in selling a business, she hired a business broker who specialized in the software industry. The broker conducted a thorough valuation, prepared detailed marketing materials, and discreetly reached out to a network of potential buyers.
Within a few months, the broker had secured multiple offers, one of which was significantly above Mary’s initial expectations. The broker managed the negotiations, ensuring that Mary received favorable terms, including an all-cash deal at closing. The entire process was completed in less than a year, and Mary was able to retire comfortably, knowing she had maximized the value of her business.
Key Takeaway: A specialized business broker can help secure multiple competitive offers, driving up the final sale price and ensuring a smooth transaction.
Investment Banker-Assisted Sale Case Study: Navigating Complex Transactions
David owned a manufacturing company with $18 million in revenue and a significant growth trajectory. Recognizing the strategic value of his business, David hired an investment banker with experience in the manufacturing sector. The investment banker positioned the company as an attractive acquisition target for large corporations looking to expand their market share.
Through a competitive bidding process, the investment banker attracted offers from several major players in the industry. The final deal included a significant upfront payment and an earnout tied to the company’s future performance, which David was comfortable with due to his confidence in the company’s growth. The deal closed at a valuation nearly double the initial estimates, thanks to the investment banker’s strategic approach.
Key Takeaway: Investment bankers are invaluable for complex, high-value transactions, especially when there is significant strategic value that can be unlocked through competitive bidding.
Common Mistakes to Avoid
1) DIY Pitfalls: Undervaluing Your Business
One of the most common mistakes made by business owners selling on their own is undervaluing or overvaluing their business. Without a deep understanding of market conditions, comparable sales, and industry-specific valuation methods, it’s easy to misprice your business. An incorrect valuation can deter serious buyers or result in accepting a lower offer than what the business is truly worth.
Another pitfall is inadequate marketing. Listing your business on a few online platforms or reaching out to a limited number of contacts might not generate enough interest. Effective marketing requires a comprehensive strategy that includes targeting the right buyer profiles, preparing professional marketing materials, and managing confidentiality concerns.
2) Broker Selection Errors: Not All Brokers Are Created Equal
Choosing the wrong broker can be as detrimental as going it alone. Some brokers might not have experience in your specific industry, leading to missteps in valuing your business or targeting the wrong buyers. It’s crucial to vet potential brokers by asking about their experience, recent transactions, and approach to marketing your business.
Another common mistake is not understanding the broker’s fee structure. Some brokers might charge upfront retainers in addition to success fees, which can add up quickly. Make sure you fully understand all costs involved and how they align with the value the broker is expected to deliver.
3) Misaligning with an Investment Banker: Know When to Use One
Hiring an investment banker for a smaller deal can result in higher costs without a proportionate increase in value. Investment bankers typically focus on larger transactions and may not provide the personalized attention that a business broker would. Additionally, their fee structures can be complex, often including significant retainers and success fees.
A common mistake is assuming that an investment banker will always secure a higher sale price. While they are skilled in managing complex deals and attracting strategic buyers, their expertise may be unnecessary for smaller transactions where a business broker could achieve similar results with lower fees.
4) Ignoring Buyer Expectations: Preparing Your Business for Sale
Whether you’re selling on your own, with a broker, or through an investment banker, preparing your business for sale is essential. Failing to provide accurate and detailed financial statements, legal documents, and operational information can delay the process or lead to lower offers. Buyers expect transparency, and any discrepancies in your financials or operations can raise red flags.
Another mistake is not considering how different buyers will perceive your business. For example, strategic buyers might value your business differently than financial buyers, focusing more on synergies and potential growth opportunities. Understanding these nuances is critical to positioning your business effectively.
Conclusion: Which Option Is Best for You?
Choosing the right approach to selling your business depends on several factors, including your industry, the complexity of the sale, and your personal goals.
- DIY: Best for owners with M&A experience, a strong buyer network, and a desire to save on fees.
- Business Broker: Ideal for most lower middle market companies, offering a balance of expertise, access to buyers, and cost-effectiveness.
- Investment Banker: Suitable for larger, more complex transactions or businesses with strategic value that could attract a high sale price.
Working with a business broker often provides the best combination of value and service for lower middle market companies, maximizing the chances of a successful sale while minimizing stress and effort.
