Over the years, I’ve heard a million horror stories from business owners about their experiences with some of the “fly by night” business brokers out there.  It’s always the same names and it always makes me wonder, “How did you get hooked up with these people?  Why did you hire them?”  I mean, I’ve seen some of their work and it’s TERRIBLE!

So, of course I feel bad for the business owner and I begin to question my ability to market my business brokerage services.  If only I had been there first.  If only these folks knew to call me or one of the other good credible brokers out there rather than the yahoo they ended up using.  Yes, you heard me right; there are a lot of good credible business brokers out there.  The problem is, there are a lot of bad, unqualified brokers out there as well.  I’m in the business so it’s easy for me to tell the difference.  But how can you, as the business owner, tell the difference?

Well, that’s a tough question to answer but I’ve been giving it some from thought and I’ve decided that the most important factors that separate the good business brokers from the bad are:

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Be a Smart Business Seller

Congratulations!  You have built your small business into a very successful enterprise over the years, and now it’s time to sell it and enjoy the fruits of your labor.  Perhaps you are dreaming of retiring next to a mountain stream with a fishing pole in your hand, or you may have other business ventures in your blood that you plan to finance with the proceeds from the sale of your current venture.  No matter what the reason, you can’t move forward until a buyer is found and a check is burning a hole in your pocket.  You probably sought out professional help when it came time to start your business - using the knowledge of your attorney, accountant, banker, and so on - so why not engage the services of a professional to help on the other end of the transaction?

The Business Broker

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I routinely read articles offering advice to potential business buyers on things to consider when embarking on the process of purchasing a business – as kind of a do-it-yourself guideline.  But I’m amazed at the lack of advice given to these buyers to use experienced professionals where applicable in the process instead of ‘going it alone’. 

A question that I often ask potential buyers is: Would you buy a house without proper professional involvement and representation?  If not, then why would you buy something as potentially risky as another person’s business without proper professional assistance?

Buying a business is a simple process if you just want a write a check and be done with it.  However, what’s complicated about the process is whether to write the check and, if so, what amount should the check be written for and under what terms.   It is wise to recognize that making these decisions requires more skill and experience than any one individual typically possesses.

Okay, so what experience or skill is needed to make a wise buying decision about a business and where can you obtain this assistance?

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It is not everyday that one goes about selling a business, nor everyday that one buys a business for sale.  Therefore, experience in the field is generally limited, both with the buyer as well as the seller. The process is also complicated by a phenomenal amount of issues, complex steps and paperwork. Even a seemingly small point,(if overlooked) could become a gnawing wound and prevent you from sealing the deal smoothly.

A survey indicates that about 99% of North American companies are planning a strategic alliance or takeover in the following two years.  The first two months of the year 2009 has already seen M&A deals worth 1.21 billion of US dollars begin announced.  This spells immense opportunity for both buyers and sellers. However, jumping onto the bandwagon without clarifying certain facts can land you into serious trouble.

Below are a few tips that help seal the deal of your M&A transaction without regrets

• Legal investigation – In order to seal the deal smoothly, both parties need to ensure that they have the legal aspects of the transaction under control. The ‘red flag’ areas must be clearly marked out. Seek through and professional advice right from the beginning of the M&A deal. The ownership deed, licensing terms, patent portfolio, etc must be examined professionally as well as personally.
• Personal investigation – All buyers know the critical importance of due diligence and the need to undertake a personal investigation of all the aspects of the business before they seal the deal. However, this does not mean that sellers can simply sit back. Keep in mind that in the business world the ultimate onus lies with the person who signs on the dotted line.

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If a business broker or M & A Intermediary is doing his or her job correctly, both sides win.  The seller is comfortable with the business opportunity or acquisition presented and the value placed on his company meets or exceeds expectations.  The buyer is confident that his best interest is at heart and the business he is buying will lead to profitability both fiscally and emotionally.  The broker’s job is to make this happen; at no point during the merger and acquisition should either party get cold feet and doubt the opportunity.

This is almost impossible to execute in the real world.  I have heard many business brokers in CT say that they tell their sellers, “I know you will wake up from a deep sleep the night before you close on your business, in a panic about selling your business, I want you to know this is normal and unavoidable.” 

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It is not a mistake to always be thinking of the day you implement your exit strategy and sell your business as you are in the process of growing it.  Many years before you go to sell your business, you are making decisions on new product lines, strategies, or new customers.  There are many factors you consider to make such decisions including risk, capacity, opportunity costs, etc.  One question you might ask yourself is the effect that decision will have on the value of your business some time in the future.  How will a Business Broker or M&A Intermediary value your Business for Sale?

A critical trade off with many product lines, customers, or strategies is the age old revenue vs. margin argument.  Is it better to start a product line that will increase revenue, but have a detrimental effect on your profit margin?  Is it better to take on a large customer, even though they demand a steep discount on your products?

When it comes to the value of your company, the answer is clear.  Revenue wins.  The positive effect that higher gross sales will have on the value of your business to a buyer is proportionally higher than the the detrimental effect on the value of your business which will come from a lower margin percentage.  In other words, a buyer will value a bigger revenue number more than a larger profit margin.

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Some readers will be asking; why use a broker, why pay these fees when I could do it myself?  The answer is quite simple, the business of selling a company is involved and time consuming which could easily lead you to neglect your business while trying to sell it.  Such neglect could create problems, reducing the value of the business by more than that saved in not paying fees to a professional broker.

Example benefits from using a professional broker are; the necessary knowledge to conduct a thorough sales campaign, experience and objectivity to avoid damaging conflict, and negotiation skills directly relevant to getting you the best possible deal.

So if you decide to use a broker, here are some thoughts that will help you to select and then engage successfully:

1. Before talking to any brokers have a reasonably clear idea of what you want to achieve by selling your business; your ideas on valuation, deal structure e.g.

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Number of Clients Represented - Business Brokers want to represent as many business for sale as they can. When contacting their vast network of individual buyers it is a real benefit to have a vast inventory of companies. Because on this, their approach is more of a mass mailing, mass email, post the business on a business for sale Web site, type of approach and their attention is spread over 25 or more simultaneous clients. Merger & Acquisition Advisors usually limit their number of engagements to 3 or 4 per professional at a time. Their approach is very hands on and labor intensive. Merger & Acquisition Advisors usually rely on a direct selling approach of calling the buyers and talking with the M&A department or the president. Often Merger & Acquisition Advisors will have specific industry niches and will have a customized data base of contacts. They often have had several prior contacts with the buyers and are able to penetrate the call screening that is set up to protect these individuals. A corporate buyer does not buy through a posting on a business for sale Web Site. A corporate buyer will open 2% or less of letter solicitations. A corporate buyer will read less than 1% of unsolicited and unknown emails. Corporate buyers demand personal and professional contact to get their interest.

Up-Front or Monthly Fees - Business Brokers generally will charge a minor up-front fee to begin the engagement or have a simplified valuation completed. Generally there is no monthly fee charged. Merger & Acquisition Advisors generally charge either a substantial up-front fee or a monthly fee in the $3,500 to $10,000 per month range depending on the size of the business.

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