How to Hire or Retain a Business Broker Including Business Broker Fees and Terms

Gregory Caruso, Esq., CPA, CVA

www.harvestbusiness.com

gcaruso@harvestbusiness.com

Business Brokers go by many names, Business Brokers, Investment Bankers, Intermediaries, Acquisition and Merger Specialists.  Business broker’s success fees or brokerage fees can be structured multiple ways but most are in the form of a back end commission.  Business brokers work to sell your business while you work to maintain outstanding profitability during the sales period.  This combination will result in the highest price.  These people perform a variety of functions, usually anything not being done by another specialist. 

Business broker’s primary goal is to increase the sales value and shorten the time on market of the business by determining the best buyer and be creating a large market of those buyers generating an auction environment when possible.  The International Business Brokers Association estimates that Business Brokers on average add 15-20% to the value of a transaction.  www.ibba.org. 

Business brokerage fees tend to be a percentage of the transaction value and tend to fall as the transaction gets larger.  Often there is also a minimum business brokerage fee.  A common business brokerage fee structure for a small transaction might be the higher of a $15,000 minimum fee or 10% of the sales value.  Sales value tends to include cash, liabilities assumed, non-competes, owner’s compensation.  In effect, every way the seller is making money from the transaction.  Commissions tend to be collected in full on notes taken back by the seller at settlement.  If an earn-out is involved the commission will typically be paid as the money is received since it is speculative.  In many cases the broker will barter a reduced fee on earn-outs for payment at settlement to simplify everyone’s accounting. 

On larger transactions around $1,000,000 or more the minimum business brokerage fee might be $75,000 and a fee schedule of 10% on the first million, 8% on the second million, 6% on the third million, and 4% above that.  This is known as the double Lehman.  Very large transactions over $10,000,000 in sales value are completely negotiable.    Just remember the important question is not what does the service cost you, it is who can help you make or keep the most money after paying all expenses. 

Retainer or other up-front fees – On smaller transactions the broker might ask for $500 to $1,500 as a non-refundable retainer.  We have never bothered on small deals but many brokers do.  We generally figure we can give about 6 hours of time to understanding a prospective transaction i.e.  understanding owner needs, a quick and dirty valuation, and a snap-shot market review. 

Remember, even if the business broker does not charge an up-front fee they will request a six month to a year minimum sales period (we always ask for at least a year or more on transactions.) This is a lot of your time if you are stuck with an incompetent broker.  Therefore, even though it is “free” if they don’t sell the business, make your choice wisely.  For more complex businesses a retainer in the range of $15,000 for a valuation and business write-up is reasonable.  We know several brokers who obtain between 10-20% of the total estimated fee as retainer either at the time of the listing or paid over the first six months. 

For larger businesses with revenues over $20,000,000 it may cost $15,000 to $30,000 or more for the brokerage firm to really break apart the financials and understand what is going on with the business and the market.  We know a quality broker that charges $5,000 per month for the first 6 months for his larger clients.  If you are being asked to pay a large fee make sure you talk to satisfied clients.  Do not let a broker use the cloak of confidentiality to tell you his clients are not accessible.  Good business brokers have plenty of clients willing to talk to you.  If they will not let you talk to past clients run, do not walk to the next broker.  If the story is too good to be true, be careful also, stories of European (Asian this year) buyers for small local companies with limited internal management are just not plausible, (if you can’t take a vacation, how are they going to run it from half way around the world) especially at a value of two to three times current market value.

Depending on the transaction you are planning and the size and complexity of your business it may make sense to pay a large upfront fee.  Unfortunately there are several firms, some backed by very well-known public companies that essentially take very large up-front fees, provide a great package, and then provide very little brokerage services while tying up the Seller.  Bigger is often not better in business brokerage and intermediary services.  Do your homework and hire the right broker at the right fee for your business sale.

Production vs. Value: Does it matter?

I’m Sorry, Tell Me Again When You Want That Delivered??


“If there is any one secret of success, it lies in the ability to get the other person’s point of view and see things from that person’s angle as well as from your own.”

- Henry Ford

 

Production.  Every business has it.  Every owner worries about it.  If you’re a manufacturer, distributor, contractor or even a service company, your livelihood and success depends on your production capabilities. And, if you’re thinking about selling your business, prospective buyers will be very interested in your “productivity.” It’s a key “metric”.

 

The point is, this is where the sales and acquisitions of manufacturing and contracting companies differ from sales and acquisitions of companies in other industries. Smart buyers (the ones you want to work with) will “dive deep” into your “productivity” during their due diligence. There are times during the “deal” process when it helps if you, the seller, think like your buyer and this is one of those times. Buyers of manufacturing and construction companies are very focused on:

• the operational and production aspects of your business 
• the “output” or “throughput” with an emphasis on both actual and maximum capabilities 
• the forward looking capabilities (note: less time analyzing historic numbers) 
• the production process, i.e. “what, how, when, why and results”  
• the deal price - what buyers see or think becomes a significant part of the deal price whereby pricing discounts and/or premiums are based on old, outdated, maxed-out production capabilities vs. new, efficient, growth potential…your business is priced accordingly

  

In particular, buyers will spend time analyzing and reviewing:

 

  

1. Capacity capabilities – are you maxed out or is there room for growth? Be careful when discussing real output and potential output. There is a theoretical number and a number that’s reality, so be clear about what is being represented.

 

2. Material and warehouse “work flow” – is the manufacturing area, assembly line, warehouse area operating efficiently or are there weaknesses causing unpredictable work completion, missed delivery and lost sales?

 

3. Parts and components design - what are the weaknesses and strengths of your design work and through-put? What impact is that having on finishing the order and generating the bill?

 

4. Continuous improvement – is there an active, ongoing plan involving improvements/solutions to the process, production, delivery and sale? How long have these processes been in place and what are the results?

  

5. Key suppliers - is the relationship strong or weak? Is the supplier a dependable, reliable source? Is there potential disruption in their delivery? Look at the auto industry…no demand, no production, no parts, suppliers folded.

  

6. Industry status – turmoil or stability? Contractors and banks are fighting to recover and health care is in a perpetual state of change. Running a business today is more dynamic than ever; change isn’t an option. It’s inevitable. Buyers want to know what your plans include.

 

7. Forward looking - historical data is interesting but for manufacturers and production businesses, it’s all about the forward-looking numbers. Buyers don’t expect sellers to make the future happen, but buyers do want to “know what they don’t know”. Sellers need to show them the way and not make the future a mystery that the buyer has to solve.

  

8. Reality check - what are the real issues and challenges? Is equipment replaced regularly and recently? How much capital needs to be invested in the ‘hard assets”? Is working capital sufficient for ongoing and growth needs? What’s going on with the customer base and how stable is key management?

 

9. Technical aspects – the buyer might not understand or appreciate the technical aspects of your operation. Put on your “sales hat” and explain it to them in non-technical terms including how your operations compare with the industry and your competitors.

 

In preparing and then presenting your production capabilities for ownership transitions, keep it simple, keep it relevant. If not, you might lose the right buyer who “opts out” early in the process. Hateful, but it happens.

  

If you’re like most business owners we work with, you’re probably curious about how your company would be “ranked” by prospective buyers. Email Greg Caruso (gcaruso@harvestbusiness.com) or Ed Davis (eddavis04@gmail.com) or call us at 443-334-8000 to find out about our “Value Builder Assessment”. This Assessment provides an estimate of your business value AND shows you where you should invest your time and resources to enhance the value of your business

 

                                                  by Ed Davis, Partner

Announcing a new website - SBA Business Valuation

The partners at Harvest Business Advisers are pleased to announce that in order to support our SBA Business Valuation services we have created the new website www.sba-businessvaluation.com. The purpose of the site is to make it easy to find us and order SBA business valuations for SBA lenders throughout the United States. 

Exit Planning in the 2012 Deal Market: Value Added Commitment

   “It’s not whether you get knocked down … it’s whether you get up”

  Vince Lombardi on Commitment

We know it’s been a rough and tough market to get deals done:  

• Values are down
• Buyers are interested, but worried
• Deal terms and conditions are different in today’s “new normal”
•  Financing remains uncertain, though improving

Yet, deals are getting done.  In the past 12-months, we’ve successfully settled 3 transactions (not bragging, just letting you know we’re persistent and active!). 

A recent survey (*) of the middle market “deal makers (i.e., buyers)” regarding their 2012 plans had some interesting findings:  

• 86% planned to complete 0-3 deals
• 79% planned to complete the same or more deals compared to 2011
• 51% reported that bank lending remains “tight’; 49% felt opportunities were improving
• 76% felt that the biggest challenge of getting a deal done was the purchase price (i.e., too pricey) and economic uncertainty
• The “hot markets” are technology, financial services and healthcare that combined represent 55% of the buyers interest
• 51% expect to finance their deals with a combination of cash, equity (stock of the buyer) and debt (bank, seller)

In our experience: the deal market is improving -- call it bubbling, but not yet boiling.  

So in a tough market, what’s the plan?  What are you going to do to add value to your company?  We’re all adjusting to the “new normal” as it is now called. To be honest, in our role as exit planning advisors, there is no magic plan; there are no new tricks.  It’s about remembering and emphasizing the good habits you had in the beginning that, over time, might be forgotten or overlooked.  Here is your opportunity to restart your business with a goal to increase the business value and prepare for your “exit”.  It’s basic business 101:

• Define your “brand”: narrow the market if needed, expand if there is an opportunity.  Revisit, reset, repeat as needed
• Diversify your customer base: right or wrong, buyers are “squeamish” when a handful of customers represent a large part of the business,
•  Customer contracts – are they “assignable”? Is that in writing?
•  Profit margins – “run your business” to improve (not minimize) profit margins.  The “profit is good enough” attitude needs to go away.  Even if you’re in a commoditized industry, you don’t have to be the cheapest in town (note:  revisit #1 above -- brand does matter)
• Recurring revenue/cash flow – if you have an opportunity to convert from single billing to repetitive monthly cash flow, consider making the change (e.g., HVAC contractors who have both preventive maintenance contracts vs. time and material). Buyers like balanced, recurring revenue streams even when it’s the same dollars
• Refresh, recharge the marketing look.  You’ve heard the expression you only get one time to make your first impression … website, tweets, social media advertising.  It’s predicted that by the end of 2012, 60% of the Fortune 500 companies will actively engage customers via Facebook marketing efforts.  Where are you?  What’s it look like?
• Management team – we get it. You’re the decision maker about everything.  Loosen the reins a little.  Your key people are most likely staying with the new owner.  Give them the flexibility and authority to make decisions you‘ve been making.  Remember, you’re creating value for your company and key people are just that … valuable!
• Management compensation plans, incentive plan:  Critical to buyers, and to your successful exit, is the ability to retain key management.  Take a fresh look at various incentive plans you could use now to retain the key staff in the event of a change in ownership.
• Debt – credit lines and other forms of debt.  Do you use them just because they are convenient?  Or is the debt really needed to provide working capital? If not needed, make it go away. 

There you go. We hope we triggered some “Aha” moments for some.  We spend a lot of time with owners and their advisors helping them plan for a successful exit. As always, if we can help you, just give a call.     

           

 by Ed Davis, Partner

 

* The Deal magazine and Merrill DataSite

Exit Planning for Privately-owned Businesses … The Beat Goes On (and On and On)

We admit we’ve been writing about exit and estate planning issues a lot recently. But we’re passionate about it and one of our goals is to keep this topic in front of you. Here’s why:

Based on a recent IRS study of estate tax returns that were filed (meaning that at the time of death the personal net worth, including the value of your privately owned business, was $600k or more) the wealthiest taxpayers held significant ownership in closely held, privately owned businesses of which:

• 80% were corporations and
• 20% were partnership type entities (this excludes the other 20 million of unincorporated, i.e., sole proprietors)

The SBA reports that there are 6.6 million small and mid-size businesses…the “economic engine of the American economy.” These businesses are responsible for 58% of all private-sector jobs, 43% of domestic sales and 51% of our private gross domestic product (that’s a mouthful).

Taking a deeper look at these 6.6 million companies:

• 55% employ less than 5 staff members
• the next 20% employ less than 10 staff members
• the top 25% employ 10 or more staff members

Further research shows that companies with 10 or more employees are often worth $1 million or more.  Another rule-of-thumb is that companies with $2 million in gross revenues are often valued at $1 million or more.

This isn’t an issue for Mark Zuckerberg to think about: you and I need to plan too. 

You ask…who are these business owners? Have you read a book called The “Millionaire Next Door”? It’s been around, but here’s what’s interesting. Statistically, you might think that the millionaire next door is the family doctor or lawyer. Not true. It’s the person who owns the local dry cleaning business, etc.

Here’s the scary part - some surveys conclude that as few as 20% of business owners have actually prepared for their exit. That, folks, is why we are vigilant about working with you now to help you prepare your exit plans. These are your goals -- think through them on your time, not someone else’s.

You’ve worked awfully hard to accumulate your worth. We want you to be as thoughtful and mindful with your exit plan. That’s our goal.

To find out how we can help you with estate and exit planning, give us a call.

              by Ed Davis, Partner