The Value of Knowledge & Experience in the Sale of a Business

May 17, 2017

Richard Branson famously said, “The art of delegation is one of the key skills any entrepreneur must master”. One activity that an entrepreneur should seriously consider delegating to a professional is the sale of a privately held company. The sale of a business is a sophisticated process requiring knowledge of accounting, law, banking, investment, business, real estate, marketing, human nature, and market conditions. Components of this knowledge can likely be obtained through reading & research by an entrepreneur, however a much more efficient process to gaining the knowledge necessary to sell a business at the best possible market value while minimizing post transaction liability & tax implications is to engage an established business sale intermediary to negotiate & facilitate the transaction.

The advantage an experienced, knowledgeable business broker offers over other potential professional advisers as a resource in the sale of a business is that they have comprehensive knowledge gained through achievement. The following is a brief overview of the nine different areas of knowledge that a business broker should be able to provide their client as a “trusted” guide throughout the sale process:

Accounting – A knowledge of accounting practices & principles is fundamental to the successful valuation & sale of a business. A business broker should be able to value a business for their client and convey detailed accounting information to a potential buyer, their CPA, and lender. Accountants & CPA’s are valuable members of transaction teams in the sale of a business providing assistance with due diligence, tax allocation, and valuation; however, they are not generally sales professionals. How information is conveyed can be as important as what is conveyed in the presentation of historical financial information. NOTE: Entrepreneurs should be VERY cautious about selecting a business brokerage firm that does not value businesses “in house” or has the valuations performed by a party other than the one presenting the business to potential buyers. Justification of the offering price is fundamental to achieving the best price for a business. A business broker lacking the knowledge of how a sale price was established is a poor party to justify the value to the marketplace.

Law – A close second in importance to the value achieved in the marketplace to an entrepreneur selling a business is the minimization of post transaction liability. No transaction should be completed by a business seller without getting legal guidance from a business attorney. That said, a secondary review of legal documentation by an experienced, knowledgeable business sale intermediary can also have substantial benefits for a business seller. The benefit offered is the wisdom of experience. A business broker that has successfully facilitated numerous sales has likely collaborated with top business attorneys in the past on transactions. This prior activity allows for the ability to provide knowledge related to what they have seen in legal documentation in previous deals and strategies employed by business attorneys in other transactions to problem solve through relevant situations. The ability to problem solve through issues between the parties is an important component in the sale of a business. Knowledge & experience are beneficial tools to have in that process.

Banking – The golden rule of lending is, “He who has the gold makes the rules”. This is definitely true when dealing with banks financing acquisitions of businesses. An experienced, business broker should be able to convey to their client the current conditions in the lending marketplace in terms of interest rates, capital injection requirements, debt service coverage ratios, and other underwriting terms & conditions to set transactional expectations. A business broker that does not have an established network of bankers interested in financing their deals offers their clients one less arrow in their quiver in terms of professional representation than one that does have the network. Today, technology tools like LinkedIn allow for entrepreneurs to research the professional network of business brokers. Connections with attorneys, accountants, wealth advisers, and bankers by a business broker are a strong indication that they do a quality job and have a track record for successfully completing transactions.

Investment – The purchase of a business at its core is an investment decision. The successful sale of a business requires the ability to sell the investment at a price appropriate for its associated risk and potential reward. In the sale of a privately held company an appropriate multiple of EBITDA is often negotiated between the buyer & seller in arriving at a price. A knowledgeable business broker with experience facilitating transactions in the relevant industry will have the ability to advise their client regarding what the appropriate multiple is for valuing their company and educate the buyer related to the justification for the business valuation. Having this negotiation facilitated by a professional is one of the primary reasons entrepreneurs hire business brokers. Different multiples are appropriate for different industries, geographic areas, and company sizes. LOCAL knowledge is KING in determining EBITDA multiples. Sophisticated, knowledgeable mergers & acquisition firms like IBA have the ability to fine tune multiples to the second place to the right of the decimal point. This can have a significant impact on business value. For example, a .25 difference in multiple in a company with an EBITDA of $1,000,000 could result in a $250,000 difference in transaction value for the seller.

Business – Business is the first word in business brokerage. It is important that a business broker understands & can convey the business model employed by their client when selling a privately held company. Basic sales training says, if interest cannot be generated from a buyer in the product being sold, the product will not sell. The information should be able to be articulately conveyed at multiple levels of depth in several communication mediums (verbal, email, etc.) depending on the venue it is conveyed and the sophistication of the business and the buyer.

Real Estate – A significant percentage of the transactions facilitated in the business brokerage world have a real estate component. This component can take the form of leased or owned real estate. For this reason, it is wise to employ a business broker that has a real estate license for the relevant geographic area. This knowledge, experience, and license will allow the business broker to value the real estate for lease or sale and/or facilitate the assignment or releasing of the space to the successor tenant. It is impossible to complete a sale of a business without addressing occupancy issues for the future. It is prudent to have the same individual facilitate that activity that is facilitating the sale of the business to insure transactional objectives remain in alignment and communication flows through one hub for distribution to relevant parties.

Marketing – The marketing & sale of a business is a sophisticated process that requires knowledge, experience, and proper systems. On one level, it is in the best interest of the seller for the maximum number of parties to know the business is for sale. On another, it is in the best interest of the company to protect the knowledge the business is for sale from entering the public domain so employees, vendors, and customers do not become aware of the sale until a buyer is selected and terms of sale successfully negotiated. It is beneficial for an entrepreneur selling a privately held company to employ a business brokerage firm that has the knowledge of where potential buyers for the company can be located, how to get in front of them, and how to persuasively present the opportunity while maintaining an environment of confidentiality surrounding the sale. Nothing speaks louder about a merger & acquisitions firm’s ability to successfully market & sell businesses than the number of transactions they have successfully completed.

Human Nature – The purchase or sale of a business is an investment and career direction decision. Both parties involved in the transaction commonly experience a range of emotions & trains of thought throughout the sale process. The best business brokers are good listeners. They will listen to questions and concerns of sellers & buyers and provide education & information in response. It is beneficial if they have worked with parties that had similar concerns & thoughts and can share relevant information. It takes time & achievement as a business broker to develop this library of knowledge & experiences that can be shared. In larger business brokerage firms, a mentorship environment exists where brokers with less than 5 years of experience and/or 25 transactions under their belt can tap into knowledge & experience to improve themselves as mergers & acquisitions professionals and for the benefit of their clients. I caution against hiring a business brokerage firm with less than 25 completed transactions. Many franchised business brokerage firms exist that try to sell a “in the box” business brokerage program. It has been my experience as a 24 year mergers & acquisitions professional that the best way to become good at anything is to “do it” and STRONGLY believe that the 10,000 hour rule conveyed by Malcom Gladwell in his book Outliers is very relevant to the sophisticated profession of business brokerage.

Market Conditions – Effective sales require knowledge of relevant market conditions. Many market conditions related to supply & demand impact the sale prices achieved for businesses in the marketplace. This creates an importance for local & specialized knowledge in valuing a business. Supply & demand components that can impact business values achieved in the market by sellers include industry, geographic location, and sale price. It is recommended that an entrepreneur selling a business select a business broker that has sold a businesses in the industry previously and serves the local marketplace.

As the President & CEO of IBA, one of the corporate philosophies I maintain at my firm is an expectation that all of my brokers represent their clients like they are representing a family member with knowledge, experience, and professional skill. I would not hesitate to refer a family member for representation to any of my business brokerage team. I encourage business owners to research the knowledge & experience of business brokerage firms before engaging their services and solicit referrals from the legal, accounting, and banking community when selecting a business broker. The only asset a business brokerage firm has is its reputation. The only way to build a good reputation in this industry is through performance in sunlight under direct observation of the legal, accounting, and banking communities.

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”.