Business Sales by Owner – FSBO Transactions

Dec 20, 2017

The characteristics of a successful entrepreneur include confidence in their decision-making ability, excellent business acumen, and prudent deployment of financial resources.  These characteristics often generate a decision point when a business owner contemplates the sale of a privately held company.  The evaluated decision being whether to sell the business themselves or engage a business broker to negotiate and facilitate the transaction.  The following article evaluates the benefits & disadvantages associated with each path to business sale.

Financial Expense – The most common motivation entrepreneurs provide for attempting to sell a business themselves is the cost savings associated with avoiding business brokerage fees.  Business brokerage fees affiliated with the sale of a business can range from five to six figures depending on the size & complexity of the transaction.  This is a significant transactional cost, especially when combined with the anticipated legal & accounting expense for a transaction.  It is wise for an entrepreneur to pause when evaluating a contractual obligation with a mergers & acquisitions firm that will accrue this level of expense to do a cost benefit analysis related to engaging the professional intermediary prior to executing a representation agreement.   It is the duty of the mergers & acquisitions professional to convey their value proposition to the business owner and outline how the benefits of engagement exceed the cost.  A good method for externally evaluating the relationship between the sales pitch & the delivered product by a business broker is to ask for references and interview the parties prior to making a contractual commitment.  One middle ground method to mitigate financial risk associated with engaging a business broker is engage a professional intermediary that is willing to be paid on a contingent basis when the project is completed.  It has been my experience that only business brokerage firms with a track record of success facilitating transactions over an extended period of time will work on a 100% contingent fee basis. There are many justifications offered in the business brokerage industry why business brokers need to collect fees & retainers up front prior to starting a representation project, however the bottom line reason for that occurring is to enhance personal cash flow between transactions for business brokers & their firm.  All successful entrepreneurs should recognize from their own sales management experience that top level salespeople always embrace performance based compensation and that salespeople seeking fixed compensation often lack confidence & ability.

Control – The second most common motivation entrepreneurs provide for attempting to sell a business themselves is that they desire to control the sale process.   The difference between a mature business executive and an immature person in management is the confidence and ability to select personnel for projects and effectively delegate responsibilities to efficiently use and leverage their time.  It is not the “highest & best” use of a business owner’s time to market a business, screen & qualify potential buyers, and administratively oversee the sale process.  It is prudent to engage experienced, knowledgeable professionals and manage their activities.         

Knowledge, Experience, & Ability – The strongest argument for a business owner engaging professional representation in the sale of a privately held company is to gain relevant knowledge, experience, & professional skills.  An experienced business sale intermediary will have the ability to properly value a business; advertise & persuasively present the business to generate the best market conditions for sale; facilitate information disclosure between the parties employing “best practices”; negotiate the terms of sale; and facilitate all administrative activities associated with the transaction from a position of knowledge & experience.  The sale of a privately held company is a sophisticated nuanced process incorporating market conditions, legal liability, tax implications, and the hearts & minds of ownership and company personnel.  Dollars can be left on the table and post transaction liabilities created if the sale process is not navigated with experience, knowledge, and ability.

Negotiation Acumen – A second strong reason to engage a business broker to sell a privately held company is that in sophisticated negotiations it is not in the best interest of the parties to negotiate directly.  Sophisticated negotiations are best conducted through intermediaries to allow the principals to evaluate options, take trial positions, and step forward at the appropriate time to make final decisions. The advantages of using a mergers & acquisitions intermediary over an attorney to negotiate business terms relevant to the sale of a privately held company range from sales & negotiation ability to not accruing transactional expense prior to agreement on the terms of sale being achieved.

Resources – A final reason to engage a mergers & acquisitions professional to sell a business is to tap into their resources.  A business sale is not completed until money changes hands.  A “willing & able” business buyer cannot complete an acquisition if they do not have the money to purchase the business.  Acquisition capital often originates at a bank or private equity firm.   Business buyers & sellers often do not know where to start to obtain acquisition capital.  Established, professional business brokerage firms have a network of banks & financial partners they can contact to help a buyer secure the capital necessary to complete a transaction.   It is prudent for a business seller to have legal & accounting counsel with experience relevant to the sale of privately held company.   Established mergers & acquisitions firms generally are known in the local legal & accounting professions and can refer professionals they have observed providing superior representation to their clients from shared experiences during prior business sale transactions.   Business brokers can also be good sources for referrals of wealth advisers for estate planning post sale, insurance brokers, and a host of other professionals serving the entrepreneurial community.

Yogi Berra famously said, “When you come to a fork in the road, take it”.  An entrepreneur interested in selling a business can decide whether they want to delegate the responsibility to a professional or do it themselves.  Both options have justifications, but it is my professional opinion that if the transactional goals include maximizing sale value, selling in a timely manner, and mitigating stress & liability that an experienced, knowledgeable business broker that is willing to be compensated 100% on performance should be selected.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.