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.

Since bankers often possess better potential contacts than most brokers do, their participation can streamline the sales process. The most successful investment bankers specialize in a short list of industries, so it pays to shop around for one with a track record and networking base that are relevant to your company.

These days, Shaw of Grant Thornton adds, "it also makes sense to look for an investment banker with the capability to sell your company internationally, because that's a growing outlet for many entrepreneurial firms." Still, he warns, "there's a big difference between an investment banker who just has an international database of prospective leads and one that has real distribution capabilities overseas." (The latter includes international offices and close affiliations with foreign investment- or merchant-banking firms.) If you think your company could attract international interest, pay special attention to that issue when interviewing bankers.

Another way an investment banker might add value is simply by accepting your company as a client. "If a well-respected banker takes your company on, then that may be a form of credential, because it's a sign to the outside world that you've been vetted by an independent expert," comments Rubenstein. "But it can be a tough call to make because some companies don't need it. We've got a client right now," he says, "who's trying to assess whether hiring someone will add or detract value from the final deal. This is a case in which the seller knows how much his company is worth, and he already knows all the possible players who might want to buy it. He can pick up the phone himself or hire someone to do it. Will an investment banker's involvement raise the price enough to justify the fee? There's no easy answer. We're trying to figure it out right now."

One final point: whether you hire an investment banker or a business broker, the issue of Internet marketing probably will be raised either by you or by your adviser. Is promoting your company's sale online a helpful strategy?

Here again, the answer depends on your company's situation. If it's small, quirky, or otherwise likely a hard sell, you can only benefit from being marketed to the broadest possible audience (so long as your Web description manages to protect your confidentiality). Growing numbers of business brokers, especially those with national affiliations, are experimenting with this advertising medium; expect the trend to continue.

Still, with upper-end deals -- the kind in which the buyers are large companies or professional investment groups rather than individuals or other small companies -- one-on-one networking matters so much that it's hard to imagine that buyers would even check out an Internet site. Rubenstein may put it best: "I will buy a PalmPilot from the Internet. But I'm not going to buy a company from it. This is one business activity that really depends upon the Rolodex, the personal contacts, and a willingness to hit the pavement."

Jill Andresky Fraser is Inc. 's finance editor.

Tax Issues

Yikes. It's complicated enough to decide when and how to sell your company. But thanks to a recent change in the tax laws, selling is now more painful than ever -- that is, if you're being paid in installments.

"The federal government used to allow sellers who received their payments over time to pay the taxes associated with the sale over time," explains Mark G. Bosswick of David Berdon & Co. "Now you can't choose to do that if you're an accrual-method taxpayer, which is the category most businesses fall into. In most cases, they've got to pay the full tax bill for the year in which the sale closes, no matter when they receive the payment."

For many small-business owners, that is a potential disaster, since they may not have the cash up front (or may not want to spend it on taxes). According to one estimate, as many as 260,000 businesses a year may be affected by the rule change.

Still, there are a couple of ways to get around the tax man. "You may be able to delay the tax bite by accepting stock instead of cash, but of course there's a risk involved, since the stock may decline in value before you sell it," says Bosswick. "You also don't achieve much in the way of diversification," he adds, "unless your investment banker designs some kind of stock-hedging strategy to accompany the sale."

An easier course of action is simply to require full payment up front. If that's your plan, shop for a business broker with proven contacts and expertise in the financing arena, so that you won't discourage potential buyers who may not have a wallet full of cash.

The Do-It-Yourself Test

Don't decide to sell your company by yourself before you answer these four questions:

1. Do you have a fairly good sense of how much your company is worth?
If not, it pays either to get an independent appraisal or to rely on a business broker or investment banker. Otherwise, you risk underpricing the company or discouraging potential buyers by pricing it too high.

2. Can you draw up a list of likely buyers?
Depending upon your company's niche, your prospects might be competitors, suppliers, strategic partners, or customers. Don't cheat here. If you really don't have a clue, you're better off relying on a professional who has already gone this route.

3. Do you really have the time to do this?
"It's incredibly time-consuming to do the networking yourself, so you've got to have the internal organization to support you," emphasizes Brendan Burns of AdOne. "The important thing is to keep your company moving forward through the whole process." If you know in your heart that you (and your staff) won't be able to manage both the sale and the company's operations, don't try to go it alone.

4. Can you do a better job than anyone else?
If you're articulate, passionate about your company, and -- above all -- not self-conscious about pitching it for sale, then the answer is probably yes. But if you suspect that your emotions or anxieties could get in the way, step aside.

Money, Money, Money

If you hire an expert to help you through the sale process, what can you expect to pay?

Business brokers
Although their fees vary, most charge a commission tied to the final sale price, generally about 10%. A growing trend among brokers is to also assess an up-front fee -- which could run as high as $10,000 -- for the preparation of marketing materials. (Tip: Beware of one scam technique in which brokers come up with wildly optimistic pricing estimates and use them to hook unsuspecting sellers into paying high up-front marketing fees.)

Investment bankers
Surprisingly enough, despite their higher level of service, most bankers charge lower percentage commissions than brokers do (mainly because they're working on deals of a much bigger scale). And there's more payment variation in this end of the marketplace. Typical fees may range from 3% to 6% of the total sale price. Performance incentives sometimes get added. On deals that are more complex (or potentially more time-consuming), some bankers charge a monthly retainer as well.

Jill Andresky Fraser is Inc.'s finance editor.

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