You are probably receiving some inbound interest in your boutique. Managing this interest correctly is very important. You get only one chance to make a first impression. There are large sums of investment capital available today. This dry powder needs to be deployed. As a result, investors have built marketing teams. These teams spend all day, every day, reaching out to owners like you. Do not overreact to calls coming in from those interested in purchasing your firm. These firms are kissing a lot of frogs. It’s up to you to manage and generate sustained information in your business.
Importance of investment bankers when selling a business
How should you manage interest in your firm? Be careful not to reveal too much information too early in the process. The idea is to create some competitive tension among possible bidders once you’re ready to sell. The best way to do that is to hire an investment banker.
For those who are unfamiliar with the term investment banker, let me explain. An investment banker works for an investment banking firm. For example, John Doe works for Goldman Sachs, J.P. Morgan, Morgan Stanley, and others. John gets hired to advise companies looking to sell, or buy, companies. In your case, John would help you determine what your firm is worth.
He and his team would prepare the marketing materials. He would reach out to a group of
potential buyers. And for those interested, he would manage what is known as a process. This involves items such as arranging management meetings, reference calls, and so on. Ultimately, the investment banker is charged with getting you the best deal. They are your representation when selling your business.
Boutiques and investment bankers
Boutiques undergoing the process of selling without a banker are making a mistake. The amount you save on commissions pales in comparison to the amount the banker makes you. For example, banker’s fees can range from 1 percent to as high as 10 percent of the sales price. If you sell for $100 million, this is real money. However, it is not uncommon for a banker to raise the purchase price by 30 to 50 percent. What is better for you: paying 0 percent commission on a $50 million sale or paying a 3 percent commission on a $100 million sale?
The first-time seller benefits from a banker in more ways than price. Boutique owners selling a business for the first time are inexperienced. They make costly mistakes that prevent a sale from closing. Selling for the right price is one thing. Closing the sale is another. Many deals have fallen apart late in the process due to an inexperienced seller. An investment banker will make sure that you do not shoot yourself in the foot. Deciding on which banker to hire is a difficult decision.
Tips For Selling Your Company
Here are some things to be aware of when selling a company. Look for a banker with relevant transaction experience to represent your boutique. For instance, an IT services firm should choose a banker who has sold many IT services firms. Look for comparable transactions over the last four to five years. Do not settle for industry-specific experience. Be sure that the experience is niche specific. Also, size is critical. Investment bankers doing billion-dollar deals are not for you. They are unlikely to take on your project. And if they do, you will be dealing with the junior varsity team.
Look at the dealing background
Look for broken deals. Ask the banker how many of their assignments do not close and why. Speak directly to the owners of these companies. Hear from them why they were unsuccessful in their attempt to sell their businesses. Seek to understand the process to develop a comprehensive buyer list. Selling boutiques is harder than selling companies with major brand power. The list of possible buyers is very long. No one banker can possibly know all the potential buyers. You need to understand how their process will surface a deep buyer pool.
Source different buyers
It is important, for instance, that the banker sources both strategic buyers and private equity buyers. Dig into the valuation range they give you. It is necessary to know how they reached these figures. Of course, it comes down to the team. Meet the actual people who will
be working on your deal. As you can see, much goes into the banker selection process. However, the most important lesson is to hire one. This is not the time to do it yourself.
Another mistake made in managing interest is scaring buyers away. Boutique owners often do not have realistic price expectations. A buyer calls, the owner is flattered, and they blurt out a very high number. The buyer politely gets off the phone quickly. They feel that there is no way to get a deal done. The price is way too high and the owner seems nuts. They move on to the next name on the call sheet. Your boutique is your baby. You believe that it is unique and is worth a lot.
However, you do not determine the price when selling a business. The market does. Your boutique is worth what someone is willing to pay for it. Nothing more and nothing less. It may make sense to suggest an initial price. This is, however, later in the process. And, please, if you do, be sure it that is market based and realistic.
Structure for success
Buyers care a lot about deal structures. In some cases as much as price. Be careful not to scare buyers away with an unrealistic structure. It is important to understand how deals like yours are structured. For instance, selling to private equity often requires rolling over some equity. If you are unwilling to do this, many private equity firms will walk away. Or, if selling to a market leader, they will likely require an earn-out. If you are unwilling to accommodate an earn-out, your buyer pool will shrink. The market will dictate the terms. Understand the common structures and try to align with these practices.
This will prevent you from running off possible buyers. Also, understand that prices and structures change a lot. Boutique owners often overreact to opening bids. They get emotional during the process. Opening bids are not insults. They are just data inputs. The price you get should increase as you go through the process. As competitors compete for your boutique, prices go up.
Unfortunately, some boutique owners get outmaneuvered by savvy buyers. At times, acquirers will throw out a big number, pending due diligence. The owner’s ego becomes inflated, and they let the fox inside the hen house. The potential buyer proceeds to lower their number based on diligence findings. To the owner, it feels like a bait and switch. And, in this instance, it is. Just remember, the sales process is a nine- to twelve-month roller-coaster ride. Stay in your seat with your seat belt on.
Attorneys and accountants
Sometimes deals take too long and cost too much. This happens when the owner does not understand roles. A banker is not a lawyer. The banker will find you a buyer and get you a deal. The attorney(s) then need to negotiate the terms. This is an additional cost and takes some time. And, like choosing a banker, selecting the right attorney matters. Do not go cheap here. You get what you pay for. The last thing you want is a lawsuit two years postsale trying to claw back proceeds. Hire the best attorney you can find and let them do their job. And then there are the accountants.
Deal structures can impact the tax bill a lot. You will want to keep as much of the proceeds as possible. How the transaction is booked can make a big difference. For example, did you know that a dollar amount will be assigned to your non-compete? This dollar amount will be recognized as ordinary income and not capital gains. You will pay ordinary income taxes on that in April. I did not know this at the time of my sale. But my tax lawyer and accountant did. And they negotiated down this tax liability, which saved me a lot of money. Again, you get what you pay for. Hire the best advisers you can.
As you can see, there is a lot to consider when managing interest.
Are you prepared to do so?
1. Are investors inquiring about buying your firm?
2. Are you making a good first impression by not divulging too much information too early?
3. Have you created the appropriate amount of competitive tension among the buyers?
4. Do you know who the right investment banker is for you?
5. Have you hired them?
6. Do you have a realistic, market-based price in your mind?
7. Have you waited the appropriate amount of time before suggesting a price?
8. Do you understand the typical deal structures for boutiques like yours?
9. Are you prepared to engage and let prices drift up over time?
10. Have you hired the best attorneys and accountants to complete the transaction?
If you answered yes to eight or more of these questions, you are prepared to manage interest well. You are likely to make a great first impression.
If you answered no to eight or more of these questions, you are not prepared to manage interest well. You are likely to run off potential buyers during the process.
You get only one chance to make a first impression. There is a lot of available investment capital. The phone is going to ring. The email in-box is going to get pinged. The social media invitations will be coming in. Be extra careful to avoid the common mistakes made by first-time boutique sellers.
Get the best experience when selling your business
Selling your company is going to take experience. It’s also going to take experience to get your boutique to the point where it’s ready to sell. You’ll want the best information out there on business valuation, and to take you through the process of selling.