Last time we looked at the role of an intermediary in a sale process, as well as what makes a good intermediary. In this post, we’ll take a quick look at why you might (or might not) want to go the intermediary route.
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 Trade-off
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 through 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.