Aug 10th, 2015 by Frank Arcoleo, Managing Director
In last month’s e-newsletter, I talked about how our biggest competitor in business transitions turns out to be the owner’s kids. Most business owners figure they don’t need an intermediary to help them pass the business on to the next generation, and they’re largely correct. However, we can assist, but mostly in helping the owner determine the value of the business, not with the transition itself.
Many people are surprised, though, when I tell them that our second-biggest competitor is “nobody.” Nobody? What I mean by having “nobody” as a competitor is that many small business owners are determined to sell their businesses on their own. Why would a seller try to do this? The obvious reason is that they simply want to avoid paying a commission. Every dollar saved on broker commissions goes right into the seller’s pocket. And they think there is no downside – they think that they can sell their own business easily and effectively.
“We are always impressed by the ingenuity and determination of the business owners we meet in creating and growing their businesses,” says Achim Neumann, President of A Neumann & Associates, LLC, the full-service M&A advisor and business brokerage firm in New Jersey, “but building and running a business is not the same skillset as selling it.”
“Most buyers are experienced in business transitions,” says Vincent Eades, Managing Director of the Southern Maryland Region. “Most sellers aren’t. Therefore the buyer has a tremendous advantage over the first-time seller.” How so?
For one thing, how do you set a price? The business seller needs to evaluate his business correctly. Unlike real estate, you can’t go on-line and look up comparative sales. “If the price is too low, the seller has left money on the table,” says Gary Herviou, Managing Director of the Central New Jersey region. “If the price is too high, the business won’t sell at all.”
Furthermore, how does a seller find qualified buyers, including, perhaps, from among competitors? Again, selling a business is not like selling real estate. “You can’t just hang a sign on the building to advertise that a business is for sale,” says Steve Wrubleski, Managing Director of A Neumann & Associates’ Southern New Jersey region. “When word gets out that the business is up for sale, many of the best employees – and best customers – will leave. The objective is to transfer value, not to destroy it!”
Even if a business seller can find an interested buyer, how do you make sure that they’re qualified? You’ll need to separate the “tire kickers” and “window shoppers” from serious business buyers. Unqualified buyers can waste your time and breech confidentiality, wasting a lot of the seller’s time in the process. Even worse, an unqualified buyer will most assuredly show up at closing without enough money to do the deal. Then what?
The seller will also need an experienced professional representing him or her during the negotiations. Once a deal is reached, all the relevant terms of the deal – not just the purchase price – need to be clearly specified in a single document. Without such specific Offer-To-Purchase, legal costs are a multiple of what they should be.
So how can a seller do all this WHILE managing the business? If the owner “takes his eye off the ball,” business will suffer, the buyer will notice it – and the price will go down. Case in point: a mere three percent decline in the cash flow, translates into a 7% to 12% transaction value reduction – easily exceeding a broker’s commission!
In this installment, I’ve discussed many of the things that can go wrong when a seller tries to save a few percent of the purchase price by doing all the work him- or herself. In this regard, our argument against the competitor “nobody” is to remind the owner that without a professional intermediary, many things could go wrong that will lead to a much worse outcome – including no deal at all or compromising the business value in the process – than if they paid an intermediary to do things correctly.
At times, business sellers will recognize the advisory value as an insurance policy against making costly mistakes. But what if there is another argument? What if there is direct evidence that using an intermediary actually increases the expected sale price by substantially more than the commission? Stay tuned for next month’s newsletter!
About A Neumann & Associates, LLC
A Neumann & Associates, LLC is a professional merger & acquisition and business brokerage firm with over 30 years of experience in Maryland New Jersey, New York, Pennsylvania, Delaware and that assists business owners and buyers with the business transfer process in a completely confidential manner. The company is affiliated with BBN, with 450 offices and access to a national network of qualified buyers and sellers. For more information, please contact A. Neumann & Associates at 732-872-6777.