In today's overheated mergers and acquisitions market, it's no surprise that many entrepreneurs are thinking of selling their company. But who should be the one to actually handle the sale?
Business 101
Who should sell your company? You? A business broker? An investment banker? How to make the call
In a mergers-and-acquisitions market as overheated as today's, it's no surprise that many of you are asking yourselves, "How much could I sell my company for?" If the potential payoff is great enough, the next question often is, "Could I sell it myself?" As with so many decisions in business, it all depends on the circumstances. When AdOne Classified Network, an Internet-based classified-advertising company, sold itself last year for close to $20 million to a consortium financed by five major media corporations, the company's CEO played a major role. "An entrepreneur must take ownership in the process. You cannot abrogate that," says Brendan Burns, the president and CEO of the original company and now CEO of the new venture, AdOne LLC, headquartered in New York City. "I handled all the contacts with potential buyers myself, which was really an exercise in networking but very important in getting it all done right. Then I relied on an investment banker to help me hammer out the best structure for the transaction."
In some situations, all that a sale-oriented adviser adds is more expense and an unnecessary level of bureaucracy. In other situations, though, it's tough to imagine how a deal could get done well without an independent expert equipped with a Rolodex full of networking contacts.
"One very big consideration is the kind of industry you're in -- and how knowledgeable you are about it," says Marc Rubenstein, a partner in the Boston law firm Palmer & Dodge LLP. "In some industries, business owners know all their competitors. They run into them all the time, and they're the most likely purchasers. Or there are only a handful of financial firms that invest in a business's niche, and again, the owners know them all."
In such cases, you can make the initial approach and even handle the negotiations if one of your contacts is interested in a possible deal. (To gauge whether that's wise, see "The Do-It-Yourself Test," below.) Assuming your company's accountant and lawyer are up to the challenge, they can prepare the necessary financial reports for prospective buyers, facilitate due diligence, and draft term sheets and other legal documents.
Then again, many owners -- even those with good contacts -- should not attempt to go it alone and instead should rely on a sales expert. "Some people just don't feel confident about picking up the phone and calling someone to say that they're thinking about selling their company. That means they're really not the best people to make the approach," says Rubenstein. "Other times, people are just great at running their businesses, but they don't have a clue about how best to package them for possible sale." That's when an M&A adviser can add value that really pays off.
When it comes to going it alone, you're in the best position if you have the right contacts and some relevant experience. "Maybe you've already sold a business before or you've been in a corporate position that allowed you to closely observe a sale," says Jonathan Layne, a Los Angelesbased partner and cochair of the corporate-transactions practice of law firm Gibson, Dunn & Crutcher LLP.
But even then, you may need help. "Especially in those deals where the owner is going to stay on for a while, either working as a consultant or as a high-level employee of the buyer, it can be very difficult to go head-to-head in bloody negotiations and then plan to show up for work for the next few years," says Layne. "It's better to have an adviser handle that kind of negotiation for you, so that you can maintain good relations throughout the whole experience."
That's a strategy Burns found useful during AdOne's complex and multistage sale process. "Having an investment banker involved helped a great deal at a couple of points," he recalls, "when we needed to defuse the tension and just step into the background for a while. I'd say that he was instrumental at those points in moving things along in the best possible way."
For business owners who conclude that they want -- or need -- some level of assistance with a company sale, there are generally two ways to go: with a business broker or with an investment banker. (Some real estate brokers also have a sideline as business brokers, but they're not worth considering if your company has assets and selling points beyond buildings and property.)
Business brokers saturate the low end of the M&A marketplace. They get involved in small deals, even those with price tags well below $1 million. They'll take on selling companies that haven't yet tapped into their growth potential, as well as fully mature businesses in less-than-sexy industries. For many low-tech entrepreneurs, brokers are the only game in town.
Good brokers can bring three assets to the table: current knowledge of the marketplace, which helps them price companies at high but achievable levels; expertise at drumming up potential buyers; and contacts with sources of financing. In cases in which the seller isn't willing to accept an extended payment schedule (see "Tax Issues," below), a well-connected broker may be able to keep a deal from tanking by hooking the buyer up with the right lender.
Still, there's a vast range in quality among business brokers. Some try to make up for their own lack of contacts by relying on an advertising or a direct-mail-marketing blitz, which can be risky. George D. Shaw, a certified public accountant and partner in charge of corporate finance advisory services at Grant Thornton LLP in Boston, warns: "Business brokers may market a company so widely that the owner basically has no other option but to sell, whatever the price, because the competitors find out, the employees find out, and the company no longer is feasible as an independent business. That's the worst possible position to be in when you're thinking about selling."
To minimize such a risk, check out potential business brokers as carefully as you would a company hire. "It's very important to look for a broker who is heavily involved in your industry and has sold companies like yours in the past," advises John Sjoholm, a senior tax partner at Nykiel, Carlin & Co., an accounting firm in Schaumburg, Ill. "Most of our entrepreneurial clients have interviewed somewhere between three and seven brokers before deciding which one to hire."
The other option is to hire an investment banker, but investment banks generally are interested in handling only significant transactions. "Significant" can mean the sale of a large private company. It can also mean the sale of a small company in a niche that attracts interest either from professional investment groups or from larger strategic partners. Although investment bankers' thresholds of interest vary, many won't consider a deal with a price tag below $3 million. (For differences in the ways that business brokers and investment bankers get compensated, see "Money, Money, Money," below.)
In certain transactions, investment bankers can add key advantages. "When deals are more complicated and there are significant tax and payment issues to be addressed, an investment banker can help with the structure," says Mark G. Bosswick, a senior tax partner, lawyer, and CPA with David Berdon & Co. LLP, an accounting firm in New York City. That might be true particularly in cases in which multiple categories of stock or other financial instruments (such as hedging devices) are involved.
In some situations, all that a sale-oriented adviser adds is more expense and bureaucracy. In other situations, it's tough to imagine how a deal could get done well without an independent expert equipped with a Rolodex full of networking contacts.
