If you’re interested in exploring a partial or full sale of your company, a big question is whether to hire an intermediary (i.e. a business broker, or an investment bank; we will use the term intermediary, business broker, and investment banker interchangeably in this article) to facilitate the process. Is this a good idea?
Short Answer
Hiring a good intermediary can be a good idea; hiring a bad intermediary is always a bad idea. To identify a good intermediary you want to ensure that they: 1) have experience doing deals in your industry and with companies of your size; 2) can articulately identify the most probably buyers for your initial buyers list; and 3) you are going to get a sufficient degree of attention from them. You want to see if you have a good intermediary before even starting to weigh cost/benefit because of the huge variability of the intermediary that exists in the market.
If they meet these criteria, weigh the cost vs benefit of hiring an intermediary. The fundamental decision on whether to hire an intermediary will come down to weighing whether the intermediary fee is justified by the administrative burden you can outsource and the incremental purchase price you can get by hiring them rather than just relying on your accounting and legal resources.
In summary, a great intermediary is worth the headache of dealing directly with potential buyers because you will get a painless-as-possible process and possibly a higher value than you otherwise would have received. Great intermediaries are very rare. An OK intermediary is potentially worth it if you greatly value the admin tasks you can outsource to them, but I would not count on receiving a higher value than you otherwise could independent of an intermediary. A bad intermediary is going to slow your process down, likely to be a drag on value, and in general be a terrible experience for you.
Longer Answer
Let’s think through the role of an intermediary in your company sale process, dig deeper in how to identify a good intermediary candidate, and then examine the pros and cons of hiring someone for this role in your exit process:
What a Business Broker/Investment Banker Does
For privately held companies, an intermediary is going to organize your materials into a presentation format, develop a buyers list of logical acquirers, approach those buyers, have the prospective buyers sign confidentiality agreements, and then look to educate these prospective buyers on the business while positioning your company in the best light to receive the highest bid.
After engaging the buyers, the intermediary will then set a date for the submission of initial bids that will gauge interest in the buyer universe in terms of relative purchase price submitted by each buyer. Typically, a subset of bids will be selected and those buyers will be chosen to meet with you and your team at the company to learn more about the company and the acquisition opportunity. For the meeting, the intermediary will generally prepare some additional materials to discuss during the meeting to give structure to the in-person meeting. After this meeting, additional requests and questions are fielded by you and the intermediary, and a final bid date is set by the intermediary.
After final bids are received, generally one party is selected by you to complete the transaction over a 45-90 day period. During this final time period before closing, the intermediary is working with you to fulfill diligence requests and coordinate legal documentation (i.e. the purchase agreement) up until the closing date where money is wired, all while ensuring that the buyer remains on track to consummate the transaction on the terms and timing you agreed to at the time of the final bid submission.
That was a whirlwind description of the process and the intermediaries responsibilities – but it really boils down to this: intermediaries organize your materials, they coordinate communication with the buyers, and they set the initial and final bid dates and organize the bids that you get at both stages of the process. Finally, they help keep the final selected buyer on track during the final stage before closing.
How to Identify a Good Intermediary
You don’t want to even consider hiring an intermediary unless it’s a good intermediary. And even if you have identified a good/great intermediary, you don’t want to hire them until it passes the cost vs. benefit analysis we’ll talk about later. So before we start weighing the pros and cons, let’s talk about good intermediaries.
Good intermediaries are very rare. Whether you’re a $500,000 EBITDA company or a $10 million EBITDA company, there are no shortage of people who want you to sign an engagement/fee letter with them guaranteeing them payment if/when you sell your company. However, you only want an intermediary that has previous knowledge and experience selling businesses in your size range and in your industry. In other words, a good intermediary will know your business, and thus knows the likely universe of buyers. Incremental to their experience and buyers list prowess, you want to ensure they will have time to dedicate the necessary resources to give you the attention you deserve. If your key point person will be juggling more than 3 active transactions during the months of your deal process, even if they have great experience they will likely not be a good intermediary for you. Further, if they don’t have support staff (i.e. analysts, vice presidents) to help them execute the deal, you will find yourself doing more of the work than you would like.
As a more concrete litmus test, if your intermediary cannot articulate answer all of the following 5 questions, they are not a good intermediary for you:
- Tell me about a similar sized deal in my industry that you recently worked on.
- Given what you know as of now, who are the top 5 buyers for my company?
- How do you propose positioning my company to maximize value and accentuate the investment highlights?
- What are the key risks or negative characteristics of my business that potential buyers will be most focused on?
- How many active engagements will you be working on during my sale process, and what does your support team look like?
If an intermediary meets the above criteria with passing answers on the above 5 questions, then you’ve identified one of the relatively rare good intermediaries. It’s now time to weigh the pros and cons of using a good intermediary.
Pros of Using an Intermediary
- Outsource the process and lessen your headaches during the process. Intermediaries primarily manage the communication and organization of the sale process, and externalizing these headaches that go along with interacting with buyers, managing a process, etc. is a valuable proposition to you as a business owner.
- Maximize value through externally managed competitive auction. Since the intermediary is primarily tasked with running a competitive process, and the intermediary is arguably more focused on this process than you could be during this time period, then the outcome should result in a purchase price at least as high, if not higher, than you could achieve on your own.
Cons of Using an Intermediary
- The biggest con is the cost of the success fee that intermediaries charge. Of course, at some price the administrative work even a mediocre intermediary does – but that’s the crux, there are standard fees in the intermediary world. For companies under $2 million of EBITDA, business brokers can charge up to 10% of the sale price in a commission structure. For larger companies, the commission percentage is smaller, but the commission fee on a dollars basis increases and is still in the 1.5% – 2.5% range even for deals with $15 million or $20 million of EBITDA. Suffice to say – it’s a real expense that thus deserves consideration.
- Risk/probability that intermediary does not spend sufficient time on process. Even if an intermediary answers the 5 questions well, hits it off you with on interpersonally, and pledges to work as hard as they can – there is a chance that once they have you signed up with an engagement letter, that tune changes. Few things feel worse in the transactional finance world than paying a $1 million success fee to an intermediary who didn’t earn it.
The fundamental question per the above is to weigh the hefty fee that you will pay an intermediary versus the value that you place on outsourcing the sale process organization management by running an externally managed competitive auction. Often, that trade-off may not make sense even with a good intermediary, but if an intermediary can ensure they will properly devote the time to organize and manage the process, maximize the value of your company thru a fulsome auction process, then you should think long and hard about engaging an intermediary.
Feel free to send me a note here and I can refer along a good intermediary or two depending on the size/industry of your company.