Sep 7th, 2015 by Frank Arcoleo, Managing Director
Two months ago, I talked about how our biggest competitor in business transitions turns out to be the owner’s kids. Last month, I let everybody know that our second-biggest competitor is “nobody.” Many small business owners are determined to sell a businesses on their own in order to avoid paying a commission. We looked at what could go wrong when a business owner tries to sell their own business, things like setting a bad price, inability to find buyers without breaching confidentiality (leading to an exodus of their best customers and employees), 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.
To sum up, as I said last month: without a business broker or M&A Advisor, 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 paying an intermediary to do things correctly. “In other words,” says Michael Feite, Managing Director of the Eastern Pennsylvania region for A Neumann & Associates, LLC, a professional Mergers and Acquisitions firm based in New Jersey, “we’re sometimes viewed as an insurance policy the owner buys to protect against something going wrong.”
But what if having an intermediary actually 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 businesses might not be statistically valid. We did find one study, however, conducted by Mercer Capital in 2007. Although it’s 8 years old, we’ve seen nothing about it to indicate it wouldn’t still be valid.
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 more 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 an M&A advisor received substantially higher pricing multiples and were more likely to maximize the value received from their investment.” Furthermore, “Those 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, “is that transaction advisors like us add substantially more value – in the form of increased sale prices – than we absorb in success fees.”
As Frank Arcoleo, Managing Director, Central Pennsylvania, noted, “there is indeed a very simple measurement we always outline to our clients: opportunity costs and reduced legal expenses. For example, reducing the time to close a deal by a single month for an average transaction value of $3m, substantially increases the receipts to a seller. Another example: using our time tested Offer-To-Purchase format provides a clear deal outline and time/action calendar without the need of attorneys having to define many details – saving both parties on the average $10,000 in legal costs for said transaction size.”
So why use an M&A advisor like us? 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 get all the details done, like orchestrate the business valuation and prepare all the marketing documents. And last but not least: we get actual sale price premiums that significantly exceed our commissions.
What could be better?
About A Neumann & Associates, LLC
A. Neumann and Associates, LLC is a professional M&A and business brokerage firm with over 30 years of experience in NJ, PA, NY, MD and DE that assists business owners and buyers with the business transfer process in a completely confidential manner. Neumann and Associates is affiliated with BBN, offering over 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.