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  • The Value of a Professional Intermediary in the Sale of a Business

    Feb 25, 2020

    Entrepreneurs by definition are individuals that have confidence in their business acumen and abilities.  Successful entrepreneurs maximize the profit potential of situations.  A natural inclination exists for a business owner to consider selling their business themselves with support from their attorney & accountant to save the five or six figure fee associated with engaging professional representation.  So, why is this not a prudent choice?   I believe the sale of a construction niche company collaboratively facilitated by two IBA business brokers, Bill Southwell and Oliver Kotelnikov, in February 2020 provides an excellent case example of some of the reasons hiring a professional intermediary is “best practice” for a business owner.

    1. Confidentiality – You will notice in the opening paragraph, I did not name the company that was recently sold.  This is because it is prudent to hold the information that a business is for sale or has been sold in strict confidence as long a possible. Prior to the sale being completed, it is in the “best interest” of the seller to keep the sale confidential because until the transaction is completed with money changing hands the deal becoming public knowledge could negatively impact executive management ability, employee retention, and customer & supplier relationships.  It is often in the buyer’s “best interest” to keep the sale confidential for a time period after the transaction is completed to allow them to learn how to manage the business without customer & supplier scrutiny and receive warm introductions to those parties from the seller. A business brokerage firm has legal documentation and processes in place to establish and maintain an environment of confidentiality.  They also serve as a retail storefront for inquires and a screening mechanism for eliminating unqualified buyers.
    2. Buyer Engagement – Many business buyers are first generation immigrants to the United States who use entrepreneurship as an entry point into our economy and vehicle to utilize their knowledge, experience, and capital for the most economic potential. The buyer in this recently IBA facilitated transaction was a Russian entrepreneur. The ability to communicate in Russian with Mr. Kotelnikov, a native Russian speaker, allowed the buyer to proceed with knowledge & confidence throughout the business acquisition process. It is likely that this transaction would not have been successfully completed without the ability to convey legal, accounting, and banking information in Russian. IBA currently has native Russian & Spanish speaking professional intermediaries on staff to better serve these two robust entrepreneurial communities.  ESL (English as a Second Language) business buyers are just one demographic group that is actively buying businesses. Industry specific buyers are also a frequent transaction partner for IBA’s “sell side” clients.  IBA is a member & resource in many trade organizations including CAMPS (Manufacturing), MBA (Construction), and WHA (Restaurants & Hospitality).  Engagement with trade organization communities may be problematic for a business owner desiring to sell either because they are not a member and/or direct conversation with competitors about a merger could be detrimental to the business.
    3. Valuation – Business valuation is a sophisticated, subjective science combining accounting, finance, & investment principles with market knowledge related to buyer demand. IBA valued the business and associated real estate for our client in this transaction prior to taking the business to market and achieved a strong market price for the company in a competitive marketplace.  This valuation was endorsed by the buyer’s CPA and lender required advocates for the transaction to complete a business sale.  An incorrect offering value in the market for a company can result in it either being sold at a discount as a value proposition or sitting on the market with limited or no buyer engagement.
    4. Collaborative Partners – It is often said, “It is not what you know, but who you know that is important in life”. An established business brokerage firm will have a network of experienced professionals to support its clients. In this transaction, the seller was referred to IBA by his wealth advisor in an effort to help the party transition their multiple decade old business asset into a passively managed asset that could be used to facilitate a comfortable retirement and/or left as part of an estate to future generations.  The results achieved produced a positive reflection on the wealth advisor as a resource.  On the buyer side of the transaction, IBA introduced the party to a CPA to facilitate due diligence, an attorney to negotiate legal documentation, and a SBA (Small Business Administration) lender to finance the acquisition of the business and real estate.   It is unknown whether the transaction would have been completed without these parties engaged in the transaction.
    5. Professional Intermediation – One of the primary roles of a professional intermediary is to facilitate discussions and mitigate confrontation between the parties. This is true whether the negotiations are between a professional athlete and a team, nations trying to establish different trade terms, or a buyer and seller in a business sale transaction.  In this transaction, unfortunately legal counsel elected to “lock horns” at several points in negotiations.   This was not necessarily reflective of the goals of the parties who wanted to find a way to “yes” and a completed transaction. One value of a business broker in a transaction is that where attorneys cannot talk to the other party, the professional intermediary has that ability.   They also have the ability to talk with the attorneys and offer alternative solutions gained from successfully facilitating similar transactions in the past.   A neutral, knowledgeable, experienced party with a high professional skill set that is not emotionally engaged in the outcome can often find the pathway through the jungle to the beach.   It is unlikely this transaction would have been successfully completed without professional intermediation by IBA.
    6. Problem Solving – Most transactions have a “curveball thrown in the dirt” at some point in the business sale. Whether the ball is professionally fielded can be the difference between a completed transaction and a failed deal.   This transaction had a unique “curveball” that required knowledge, experience, professional intermediation between the parties, and a collaborative partner to problem solve successfully. The situation related to the sale of the real estate, an asset IBA has the ability to comprehensively sell along with a business as a respected member of the commercial real estate community. In this transaction, our “sell side” client had purchased the real estate over a decade ago.  At the time of acquisition, he had paid for phase 1 & 2 environmental assessments and obtained financing based on the clean condition of the real estate. The clean condition incorporated knowledge that oil tanks had been previously located on the property and removed.   Moving forward to 2020, a phase 1 environmental assessment was completed by the buyer with no new contamination found, however the bank decided a phase 2 environmental assessment was necessary because relevant regulations had changed since the last phase 2 environmental assessment.   This assessment found that although declared clean previously, the new regulations required a remediation plan to assess a small parts per million contamination issue that was now inside the threshold required in the relevant area for a property to be declared clean and be suitable for financing.  Bill Southwell & Oliver Kotelnikov worked with the parties and a highly regarded environmental remediation firm to come up with a plan to satisfy the bank and parties.  Economic contributions were necessary by the buyer, seller, and IBA to reach a point of satisfaction acceptable for completion of the deal and funding by the lender.  There is a high probability the deal would have failed without the engagement of IBA as a knowledgeable, experienced commercial real estate firm with a deep Rolodex of professional collaborative partners.  This unique environmental situation was caused by the moving sands of government regulations.  It had nothing to do with the operation of the business.  The situation was not unique in that all deals have an “all hands on deck” moment where a professional mergers & acquisitions intermediary can be the difference between success or failure for a transaction.

    IBA successfully completes 80 – 90% of its business sale engagements annually.  The national average for businesses advertised for sale selling ranges from 15 – 25% per year.   If you are thinking of trying to sell your business yourself or engaging a business brokerage firm without significant knowledge, experience, and a high professional skill set, I wish you “good luck” and hope you achieve your goals.  If you want to interview a firm for the job that has completed over 4000 transactions in the Pacific Northwest since 1975, our deep and talented team of business brokers would welcome the opportunity to provide an overview of our client services.

    IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities 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”.

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