Getting the Most from a Business Sale

Many small business owners are determined to sell their businesses on their own in order to avoid paying a commission.  That’s understandable – sellers want as much money as possible from the sale of what is likely to be his or her biggest asset.  They think they know one or more individuals that might be interested in buying the business, so all they have to do is talk to them and get a deal in place.

But how do you really maximize what you get as a seller?

The obvious first choice is price.  In many ways, trying to maximize sale price is like playing “The Price Is Right,” the TV game show that’s been with us for nearly 50 years.  In the game, contestants guess the price of an item.  They try to get as close as possible to the item’s price but without going over the actual price.  It’s the same with a business.  Price it too low and the business sells, but the owner leaves money on the table.  Price it too high and nobody buys it.

In order to maximize proceeds, the sale needs to be at the highest achievable price.  The way to find out that price is to have an independent 3^rd party valuation company perform an objective assessment of value.  Yes, business valuations do require an up-front investment, but the ability to maximize the asking price is nearly always substantially more beneficial than the cost of the valuation.  An independent business valuation also serves as documentation of how that price was determined.  If buyers don’t want to pay the asking (valuation) price, then it’s incumbent on them to identify what’s wrong with the value calculations.  In our experience, they rarely are able to do so, and as a result, nearly all businesses sell at, or very close to, the asking price.  And the fact that the valuation was performed by an independent, professional, accredited firm lends additional credibility to the results.  (And we actually refund the cost of the valuation at the time of sale, so there really is no cost to the seller.)

No matter how the asking price is determined, it is important for the business not to lose value during the selling process. This can happen in a number of ways.  If customers and employees find out that the owner is working on selling the business, uncertainty about the new owner could cause customers to consider alternate suppliers and employees to consider alternate employers.  Loss of key customers and employees will be noticed by a prospective buyer, who will likely want to renegotiate the price based on the diminished capabilities of the business.

Additionally, owners trying to sell businesses themselves risk neglecting ongoing operations while they try to manage the sale, and wasting time with buyers who don’t even have enough money for the down payment.  This lack of focus can be significantly detrimental to the sales and profitability of a company, with the resultant loss of value.

Many things can go wrong that will lead to a much worse outcome – including no deal at all or compromising the business value in the process – than paying an intermediary to do things correctly.

But what if having an intermediary actually, on average, increases the sale price MORE THAN the cost of paying a broker commission?

“Intuitively, we’ve always believed that we add a substantial amount of value to a transaction,” says Achim Neumann, A Neumann & Associates’ CEO, “but believing it and having evidence to substantiate such a claim are two different things.”

It’s hard to find any study to prove our worth.  You can’t look at the same business with and without an intermediary – it only sells once!  To compare different kinds of businesses might not be statistically valid.  We did find one study, however, conducted by a respected firm, Mercer Capital.

The Mercer Capital study was done on banks, particularly small private banks, because it’s one of the few industries that has both enough available financial information about the banks themselves as well as about the transaction prices – the prices for which the banks were sold.  One might think that an analysis of bank transactions would not apply to them.  Instead, it might apply even mores so.  According to a description of the study by Jay D. Wilson, Jr., published in their Mercer’s “Value Matters” newsletter, “The transaction data analyzed clearly indicates that transaction advisors play a very significant role in helping owners maximize the value received for their banks, despite the increased level of information available.”

How significant?  Controlling for bank size and other factors, says Wilson, “It was found that those sellers who utilized a transaction advisor received substantially higher pricing multiples and were more likely to maximize the value received from their investment.”  Furthermore, “[T]hose banks sold with the assistance of a transaction advisor received a 20% higher price to earnings multiple and a 15% higher price to tangible book multiple.”

For most non-banks, price to tangible book multiples are not very relevant.  But price to earnings multiples are critical.  “What this study says,” comments Gary Herviou, Vice President of A Neumann & Associates, “is that transaction advisors like us add substantially more value – in the form of increased sale prices – than we absorb in success fees.”

So why use an M&A advisor like A. Neumann & Associates, LLC?  Well, we preserve confidentiality while getting the word out to the maximum number of potential buyers.  We qualify buyers to make sure they have the money to do the deal, preventing a business owner away from wasting time on “window shoppers.”  We make sure all due diligence is performed correctly – like orchestrating the business valuation and preparing the marketing documents.  And last but not least: we get actual sale price premiums that significantly exceed our commissions.

What could be better?