Selling a Sophisticated Service Company

Nov 9, 2015

A search of the business opportunity marketplace by a party looking to complete an acquisition will traditionally find that a majority of the offerings are food service, retail, or franchised business models. The marketplace for these business models is robust and well served by the business brokerage community. However, an entrepreneur who owns a manufacturing, distribution, technology, industrial, or sophisticated service company may not be well served during the sale process by a business brokerage firm that is good at selling restaurants and small format retail businesses as the knowledge, experience, and professional skills necessary to successfully represent businesses for sale is significantly higher for more sophisticated business models.

IBA has a reputation for providing the highest level of representation available to owners of privately held companies in the middle market in the Pacific Northwest. One niche where IBA’s representation services are commonly sought is by entrepreneurs who own sophisticated service companies. The successful sale of a sophisticated service company requires the ability to complete the following activities.

Business Valuation – The first step in the sale of any business is to determine the value to offer it to the marketplace. Business valuation is subjective science requiring knowledge & experience. The valuation of a sophisticated service company is uniquely problematic due to the lack of similar company sales to reference, the difficulty in assessing market share & size, and the need to allocate adjusted cash flow appropriately between the labor skill set provided by ownership and the financial return the company provides to ownership. The first two valuation obstacles conveyed are straightforward. However, the third may require additional explanation that can be best conveyed by a transactional example.

A previous representation project of IBA involved the retirement sale of an environmental chemistry audit firm. The company had a national reputation for quality validation of research & reports for government and pseudo government entities like NOAA (The National Oceanic & Atmospheric Administration). The two company shareholders, individuals looking to facilitate a seamless transition of ownership for their customers & employees, were highly educated individuals with unique experience. To properly value this company, market values needed be established for their positions. These values once established could be subtracted from adjusted cash flow and the remainder used for valuing the business including calculating an appropriate projected return on investment given the associated risk for the buyer following the acquisition. The salary values were also able to be used during an extended transition of ownership for compensating the individuals at a “fair market” rate verifying that the valuation of the positions was accurate. (Valuation Observation: It is recommended when valuing a company that historical compensation of officers not be used to determine compensation for a position. Compensation of officers on a tax return is often out of line with the market value of a position and commonly strategically under compensates ownership for tax reasons.)

Professional Sales – The successful sale of any product or service requires a presentation that articulates the attributes & benefits of the item to a potential buyer. Professional representation of a sophisticated service company requires an individual that can convey the business model, financial history, market niche, and future opportunities presented by the company. If this cannot be accomplished, the company will not sell or will sell at a value reflective of the amount of information conveyed. It is recommended prior to selecting representation that business owners have the party convey to them an overview of their business model and competitive advantages of their business to assess the level of knowledge and sales skills of the individual. The same beef product can be presented on a plate as a Filet Mignon or a hamburger; however the two different products deliver dramatically different prices from consumers in the marketplace.

Transactional Terms – The risk of disruption to a business model is greater in the sale of a sophisticated service company than in many other business models. This is generally the case because customer relationships are built on a foundation of providing quality, knowledgeable service and proactively cultivated and maintained. To minimize this risk for a business buyer the transactional terms in this type of sale often include either a variable price element or an extended period of transition training by shareholders who fill “key” labor positions in the business. It is important in a transaction of this nature to have representation with the experience and knowledge to offer “win-win” problem solving solutions to facilitate a proper allocation of risk between the parties and set up the business for a successful transition of ownership.

The sale of a sophisticated service business is not a project that should be assigned to a business broker lacking the knowledge, experience, and professional representation skills necessary to complete the transaction at a fair market value in the best possible environment for future success of the business any more than a person used to canoeing on a lake should be asked to navigate class 5 rapids. IBA has sold many sophisticated service companies in its 40 year history. I personally had the honor this summer to represent one of the most knowledgeable individuals in the United States on business acquisition lending, Joanna Bruno, in the sale of her sophisticated service company, J.R. Bruno & Associates, a company that as professional consultants helps banks build & operate lending departments employing “best practices” with regard to business loans backed by the Small Business Administration (SBA). Ms. Bruno & I first met at a Small Business Administration (SBA) educational conference where we both presented information to a regional group of business bankers. This transaction is another example of a sophisticated service company successfully sold by IBA. It is my opinion that there are only a handful of business brokerage firms in the United States that could have completed that transaction on the terms achieved while maintaining an environment of confidentiality. If you are an entrepreneur with a sophisticated service company, we would welcome the opportunity to provide you with an overview of the strategies & services we provide our clients. IBA has facilitated sales of sophisticated service companies as brokers & consultants in the Pacific Northwest, California, and in as distant a location as the research triangle of North Carolina.

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 in terms of successfully negotiating transactions that are “win-win” in an environment of full disclosure between the parties.