IBA Blog

  • Categories
  • Authors
  • Archives
  • Marketing a Middle Market Company with a Price or without a Price

    Oct 11, 2016

    Two strategies exist related to selling a privately held company among the mergers & acquisitions firms that serve the middle market in the United States. One strategy is that you do not price a business for sale and allow the market to value the business through the generation of multiple offers. The second strategy is that you price the business for sale and present a price that can be professionally justified to the market.

    The thought behind the first strategy is that a business brokerage firm through a persuasive & articulate presentation of a business to the marketplace can create an “auction” environment where potential buyers evaluate a privately held company without a defined reference point of value and generate offers based on their perception of value and the market demand for the business. This strategy has the potential to generate above market values for the business. It also has the potential to generate below market values for the company. The key to success for this strategy are a robust marketing effort, the generation of multiple offers, and the ability for market conditions to determine the value of the business in a competitive environment. Some business brokerage firms are excellent at generating this competitive marketplace and have a track record of success for their clients employing this business model.

    The second business sale strategy employed by mergers & acquisitions firms serving the middle market is to price the privately held company prior to presenting it to the business opportunity marketplace. This strategy is employed at IBA, the Pacific Northwest’s premier business brokerage firm since 1975. The following are the reasons the professional business intermediaries at IBA employ this strategy when representing a business for sale.

    Valuation of a business is an activity that requires knowledge & experience. Business owners select IBA for professional representation in the sale of their businesses to obtain these attributes to help navigate a process they are generally unfamiliar with as entrepreneurs. Our professional business brokers desire to demonstrate their knowledge & experience early in the sale process.

    Valuation of a business is subjective science and a problematic process due to the fact that it requires marrying accounting & investment return analytical models with valuation of a “one of a kind” object that shares many of the characteristics of selling an object with intangible value like a piece of art. These incongruent valuation concepts are woven together when valuing a business and placed into the market conditions that can result in the business either selling at a premium or discount based on an assessment of the marketplace by a knowledgeable & experienced professional. Market knowledge of completed transactions in the relevant industry and/or geographic area dictates where on the sale price spectrum a business is placed on the market.

    Demonstration of this level of knowledge & experience and justification of a business value to potential clients and regularly their CFO and/or CPA is a difficult bar to clear. It is not a task desired by many of the firms that elect not to price businesses because presentation of a value will require them to be accountable for that value in the marketplace. The professional business sale intermediaries at IBA embrace this demonstration & accountability providing the business value as a complimentary service to potential clients and standing strongly behind the provided figure during the term of their representation. Our successful completion of over 4000 transactions on behalf of sell side clients consistently within 10% of the original asking price documents IBA’s ability to correctly value privately held companies.

    It should be noted that a significant number of the business brokerage firms that employ the strategy of valuing a business prior to presenting it to the marketplace charge clients upfront for a business valuation in the form of administrative retainers and valuation fees. This business model supports administrative operations at those firms. However, it has been our experience that firms that charge fees upfront often delivery above market valuations to have a happy customer post payment or outsource the valuation because they do not have the knowledge & experience “in house” to complete the valuation. 100% of IBA’s fees are paid on performance at completion of the sale, so our financial incentives are directly aligned with our clients and all business valuation are performed by the IBA business broker that will be representing the business to the marketplace.

    Demonstration of knowledge & experience to clients is the preliminary reason for pricing a business before introducing it to the market. The more significant reason is that the valuation process provides the IBA business broker with the knowledge necessary to justify the price of the business to potential buyers. It is basic sales strategy that the better a salesman knows the product they are selling the better they will be able to sell it to potential customers. This is true whether an individual is selling a vehicle, equity position in a publicly traded company, or privately held company. The secondary advantage of having a price that can be justified to potential buyers is that the business valuation process is truncated for buyers because rather than having to start at the beginning in valuing the company a business buyer has the ability to affirm an existing business valuation. This shortened business evaluation period allows more business buyers to quickly assess the acquisition opportunity and determine if they wish to engage in negotiations related to a potential purchase of a company. The result is more competition for a company in the marketplace than for firms that employ the non-pricing sales strategy provided both business brokerage companies employ similar robust marketing strategies on behalf of their clients. IBA has a track record for generating multiple offers for consideration for its clients and has experienced, knowledgeable business brokers with the sales skill set to facilitate negotiations with multiple parties simultaneously.

    A final reason for pricing a business for sale is that a priced business can be evaluated by banks for acquisition financing prior to a buyer reaching agreement with the seller for the purchase & sale of a business. This ability allows a business brokerage firm, such as IBA, to insure that a business is not pulled from the market prematurely by a buyer that does not have the ability to complete a transaction. IBA strongly encourages business buyers to bring their bank and/or investors into the process early to help facilitate negotiations from a position of knowledge on both sides of the table.

    A spectrum of paths to sale are employed by mergers & acquisitions brokers in the sale of privately held companies. All paths can result in a positive outcome. However, it is our professional opinion at IBA that the best road to sale for a business owner is to employ a business brokerage firm that places a value on a business before introducing it to the marketplace and requires no payment for service until the successful sale of the business is completed.

    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”.

    Related Articles

    Conversation

    Leave a Comment

    Your email address will not be published.

    Leave a Reply

    Your email address will not be published.

    More Articles by this Author

    Recent Articles

    Should a Business Owner Grow Organically or Thru Acquisition?

    IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies…

    The Story of David Shinder (Pedag USA)

    American Dream Achieved IBA, as an approximately fifty-year old business brokerage firm serving the entrepreneurial community of the Pacific Northwest, has been uniquely positioned since before the American Bicentennial celebration of 1976 to witness and hear the stories of thousands of people who have lived the American dream through entrepreneurship creating beloved businesses by employees,…

    Afraid of Starting Your Own Business, Conquer Your Fear and Learn How To Take Risks 

    IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies…

    Contributing Authors

    Sign Up for Our Newsletter

    Popular Articles Delivered Directly to your inbox