Business Sale

Selecting a Business Broker to Sell Your Company in 2021

Timing, location, quality, and an understanding of market dynamics are critical elements in the successful sale of a product or service. A product or service offered for sale when there is high buyer demand at a location will typically sell. However, a completed sale is a minimum threshold for an entrepreneur seeking customer loyalty, longevity, and profitability. Obtaining those elements requires knowledge, experience, and strong business acumen. The ultimate sale for a business owner is the sale of their entire entity. That sale will end a chapter of their lives and if done correctly will achieve a strong market value, be completed in an environment of confidentiality employing best practices, and mitigate legal and tax liability. Selecting the right business broker to sell a privately held company or family-owned business is commonly regarded as one of the most important decisions an entrepreneur can make during their tenure of ownership.

Many business owners will only make the selection from a group of referred parties from their attorney, CPA, banker, wealth advisor, SCORE counselor, friends, and/or family. A referral from a trusted advisor is a wonderful place to start the interview process associated with selecting a business broker. A professional intermediary with a positive reputation that proceeds them is always preferred to the mystery box selection of a person unknown to anyone in your world.

If a referral is not available or if a larger list of merger & acquisition intermediaries is desired to interview, another excellent way to identify the “best of the best” business brokers serving a specific geographic area or industry is to look for online testimonials and reviews. Most successful, established businesses have testimonials on their website, if they do not, one should wonder why? IBA is unique in the business brokerage community in that in addition to standard written testimonials, it offers video testimonials from past clients willing to go on the public record relating to their experience working with IBA on its website. Google, LinkedIn, Facebook, and Yelp also offer venues for customers to provide feedback on their experiences working with individuals and companies that are available for public review.

One insider trick to obtain a referral without disclosing that you are thinking about selling your business to people in your professional or personal network, something many entrepreneurs wish to keep confidential until a buyer has been identified and a deal negotiated, is to look up intermediaries and/or business brokerage firms in your marketplace on LinkedIn and see if they are connected to people you know and trust in the business community.

The decision made to explore a company sale in 2021 and a meeting scheduled to interview a business broker, the next step is to prepare for the meeting. The following is an overview based on my nearly thirty years of experience selling privately held companies and family-owned businesses of the topics for conversation that should be discussed in an introductory meeting.

Knowledge – One of the attributes being purchased when hiring a professional M&A intermediary is knowledge of all aspects of the sale process and the strategies that can be employed to achieve the best possible outcomes in negotiations. Knowledge can be possessed by an individual or firm. No individual person can know everything. This is true whether it involves lawyers, CPA’s, or business brokers. A large, established M&A firm offers its clients a deep pool of diverse and industry specific knowledge and traditionally participates in regular internal and external education programs to keep its brokers current on relevant issues ranging from federal & state tax law changes to legal precedents impacting business, environmental, and real estate law to underwriting & lending policies impacting acquisition capital financing. It is wise for an entrepreneur to inquire about what an intermediary is doing to stay current and enhance their knowledge base.
Experience – There is no substitute for experience. Professional representation of a business sale is a sophisticated, nuanced process requiring completion of numerous, supervised transactions to obtain a satisfactory level of quality as a business brokerage professional. Superior performance requires a greater body of achievement across a spectrum of industries, economic conditions, and geographic areas in a diverse set of circumstances. Don’t hesitate to ask a business broker how long they have been in the business, how many deals they have personally negotiated, how long the firm has been around, and how many deals it has done. These are all questions worthy of honest answers. When personally asked these questions, my answers are 28 years, over 300 deals, since 1975, and over 4200. I am very proud of the legacy experience of IBA. No business brokerage firm in Washington, Oregon, or Alaska has sold more businesses over the last fifty years than IBA. No business brokerage firm in the Pacific Northwest sold more companies in 2020 than IBA. Evidence of knowledge and experience can also be found in whether a business broker has a body of work in terms of seminar speaking engagements; television, podcast, and radio interviews; and written literature online and in print. IBA’s deep and talented team of business brokers has been a sought-after media resource for almost five decades in the Pacific Northwest.
Professional Skill Set – Mergers & acquisitions requires a diverse, specialized skill set. The best business brokers have the ability to wear an accountant’s visor to value a business; a seasoned sales professional’s ability to create a marketplace, persuasively convey the positive attributes of a product, and justify its market value; a professional negotiator’s ability to get intelligent, thoughtful parties to “Yes” with divergent interests; and a skilled administrator’s ability to facilitate progress through necessary steps & processes by accountants, lawyers, banks and/or investors. It is strongly recommended that any business broker being interviewed be asked about their most recent & difficult transactions. Questions should also be asked about their relevant experience selling similar companies in the same industry and/or geographic area. The skill set and knowledge needed to sell a technology company with significant intangible assets is very different than the skillset and knowledge needed to sell a cannabis business and facilitate the relevant licensing process for a buyer.
Resources – One of the common jobs of a business broker is to help the buyer locate the funds necessary to buy a specific business. Although this may appear as a buyer side representation project, it is in fact a responsibility that often falls on the shoulders of the sell-side intermediary since neither the seller nor their representative can achieve their ultimate goal – a completed sale – without the buyer having secured the necessary funds to complete the deal. Business loan approval & underwriting policies can vary greatly in the lending community. It is prudent for an entrepreneur to engage an experienced, knowledgeable intermediary that has an established network of banking professionals with decision making authority they can contact when seeking acquisition capital for a transaction. It is also wise to work with a business brokerage firm that completes a large number of transactions annually, as banks often look at these firms as repeat wholesale clients, versus the single project designation of most individual business buyers, based on the volume of loans they originate for the lending institution and will problem solve more aggressively and fight harder internally for loan approval recognizing the value of being a preferred lender for a high performing, regional business brokerage firm. It is also common at IBA to find buyer acquisition financing when a party has appeared to strike out seeking funding on their own. A business broker can also be a great source for referrals of attorneys, accountants, wealth advisers, appraisers, 1031 exchange facilitators, and a spectrum of other specialized professionals relevant to an M&A transaction.
Likeability & Integrity – The relationship between a business broker and their client is commonly short (3 – 9 months at IBA), but personal with frequent communication. As a general rule, people do business with people they know, like, and trust. If initial communication with a business broker is not collaborative, informative, and positive then an alternative professional representative should be interviewed for the position.
Broker Compensation – There are two dominant business models in business brokerage. One business model, the compensation model employed by IBA, is a real estate business model where the business broker is paid 100% on performance at completion of the transaction when their client is paid. The other business model involves the business broker being paid upfront fees & retainers. In theory, both business models end with approximately the same level of compensation for the broker after a successful sale. However, it is also true that many businesses represented for sale by business brokers do not sell due to incorrect pricing, the business broker’s inability to create a marketplace for the company filled with interested parties, an intermediary’s inability to get interested parties to reach across the table and shake hands on a deal and/or the inability to locate the funds necessary to complete the transaction. Business brokerage is a “black & white” profession with a clear objective, sell businesses. It is my professional opinion that the “best of the best” in business brokerage are paid 100% on performance. Any salesperson that seeks a retainer generally does not have confidence in their abilities as a salesperson.

Three business brokerage services stand out in importance above all others in the sale of a business. Each of these should be discussed in detail when interviewing a professional intermediary to potentially sell a privately held company or family-owned business.

Business Pricing – The proper valuation of a business requires the ability to combine accounting, finance, and investment knowledge with market information related to specific industries, geographic areas, economic conditions, and buyer demand. It is impossible to do this without active engagement in the relevant marketplace. The most accurate business valuations are delivered by local firms employing knowledgeable, experienced professionals. Ultimately, a business value will be validated or rejected by the marketplace. Most business values need to pass scrutiny by the buyer, their CPA, bank, and/or investors before a deal will be completed. It is critical to hire an intermediary that has the ability to justify a price to a demographic spectrum of buyers and their professional advisors. The best way to assess the skill & knowledge of a business broker in valuing a business is to have them value your company. Firms like IBA that are paid 100% on performance will provide a professional opinion of the market value of a business as a complimentary service to demonstrate their knowledge, experience, and ability. The other reason the service is free is because the paid-on-performance business model does not work unless transactions are completed, so on the M&A firm’s end they want to insure there is a market for the business, they can effectively work with ownership, and sale objectives are in alignment with the client.
Marketing – The marketing of a business for sale is a unique challenge. On one level, as with all products, the goal is to create the most robust marketplace for the sale as possible. However, in the sale of a business most sale-side clients do not wish for their customers, employees, competitors, or vendors to know the business is for sale, so equally important to a high exposure marketplace is maintenance of an environment of confidentiality throughout the sale process. These conflicting objectives require development of a sophisticated, comprehensive marketing strategy. It is important for an entrepreneur to understand and approve a business broker’s marketing strategy before selecting them for exclusive representation.
Negotiations – Few sales have as many significant elements that require negotiation as a business sale transaction. A properly negotiated and structured business sale will commonly incorporate business, tax, legal, employment, and real estate components. Each element has financial and liability creating implications. It is prudent to have experienced, knowledgeable, highly skilled professional representation to insure the best possible outcome is achieved in a multiple tiered, nuanced negotiation. A quality business broker should be able to provide an overview of all the areas where future negotiations will be probable before an entrepreneur starts down the path to sale.

If you are considering the sale of your business in the Pacific Northwest in 2021, IBA would welcome the opportunity to interview for the job of business broker. We strongly believe you will recognize a difference between our professionals and firm versus others serving the Main Street and Middle Market as mergers & acquisitions intermediaries. All communication is held in strict confidence.

Contributed by Gregory Kovsky

Buyer Demand for Businesses Robust Today & into the Foreseeable Future

IBA, as a forty-five year old business brokerage firm, has successfully facilitated business purchase & sale transactions during periods of prosperity and difficulty in numerous economic cycles. One of the pleasant surprises in the mergers & acquisitions marketplace during COVID-19 is that, with the exception of an assessment slowdown in March & April, buyer demand has remained strong for quality, mature companies. This information is being conveyed from the trenches by experienced, knowledgeable intermediaries and is documented in our offices with the six deals we have completed since May 1 and the ten transactions IBA presently has in escrow pending sale for later in the summer and autumn.

A question commonly asked in our conference rooms by potential clients is should I sell now or in the future? The motivations for selling now include the desire to retire, reap the financial rewards of quality execution and hard work, and taking advantage of the present long term capital gains tax rates. The advantages of selling in the future are that a business owner gets to continue doing what they enjoy and reap the financial benefits of ownership. Every successful business owner is ahead economically, all things remaining constant, by owning a business another year and selling for the same or greater value in the future.

A cursory look at the population sizes of the Baby Boomer Generation (People born between 1946 – 1964) and Generation X (People born between 1965 – 1980) might cause an entrepreneur concern that the supply versus demand dynamic might change as Baby Boomers try to retire and sell their businesses due to the smaller size of the next generation.

As a twenty-six year professional intermediary compensated on performance with payment of a commission on the sale of a company, it is in my best interest to tell business owners, you should sell NOW!!! and justify that action. However, as a professional affiliated with a firm that lives by the “Golden Rule” of do unto others, as you would have them do unto you, it is my pleasure to share my assessment that there is no urgency, other then potential changes in tax rates and government policy, to move forward the sale of a profitable company where an entrepreneur goes to work with a smile executing their vision, in the next five to twenty years, unless there is personal motivation to create an exit strategy. The reasons I believe a robust group of buyers will exist beyond 2040 for privately held companies and family businesses are as follows:

It is true that the front end of the Baby Boomer generation has started to transition into retirement and that Generation X is smaller in population than the preceding generation. However, the business sale marketplace is not a B must replace A marketplace. The reality of the situation is that three generations (Baby Boomers, Generation X, and Millennials), a group with no biological clock, and an external population to the United States will be seeking acquisition opportunities involving quality companies far into the foreseeable future.

The second half of the Baby Boomer generation was born between 1955 – 1964. This group has approximately 35 million members between the ages of 56 – 65. This group is anticipated to remain active members of the entrepreneurial community for another five to fifteen years. Many in this group are actively seeking business acquisitions currently and should continue past 2035 for the following four reasons:

Business is the ultimate sport. The thought of getting out of the game of business is not attractive to many people with entrepreneurship in their DNA. It is not uncommon for an entrepreneur to acquire a business (Perhaps to mentor a child or build a legacy) and/or desire to work well into their 70’s.
Retirement savings are insufficient. It is much easier to maintain a desired quality of life with an inflow of capital than trying to stretch the lifespan of a diminishing asset base. Business ownership is a wonderful tool for deferring tapping into retirement accounts while having an opportunity to create a desired work/life balance.
Return on Investment for Wealth Creation. Owning a privately held company offers one of the highest returns on investment opportunities available in the marketplace (Commonly 15 – 35% depending on the industry and size of the business). These returns on investment are reflective of the inherent risk associated with being in busines for yourself. That said, many entrepreneurs would prefer to “bet on themselves” with their capital resources than invest in assets they do not actively control.
Corporate Cost Cutting. Unfortunately, experienced, highly paid management personnel are often evaluated with a critical eye in the corporate world. A perception exists that bottom lines and productivity have the ability to be enhanced through replacing senior personnel with younger, less costly, highly motivated people. This dynamic often creates situations where people are forced to look for jobs before they are ready to retire. These individuals are excellent candidates to purchase businesses as they have significant knowledge & experience and the capital resources necessary to make down payments and obtain acquisition financing. One benefit of entrepreneurship versus employment is the opportunity to sell a business for value reflective of its performance. It is not uncommon at IBA, as a 45-year old firm that has successfully facilitated over 4200 transactions, to sell a business for a party that previously purchased the company through IBA.

Following the Baby Boomer Generation is Generation X, a group of roughly 65 million in size. This population is currently 40 – 55 years of age and has only recently reached a point where the entire spectrum of the generation has the experience and resources needed to buy privately held companies and family owned businesses. It is anticipated that members of this generation will be buying businesses aggressively for the next thirty years.

Directly behind Generation X is a generation, the Millennials, that is approximately the same size as the Baby Boomer generation. The front 1/3 of this group is already contributing buyers to the marketplace. One new market method this group is employing to overcome a shortage of acquisition capital is partnering with investors using a Search Fund model, where a rising business star contributes sweat equity to the company as executive management while being backed by parties looking for a double digit return on their capital investment and an opportunity for appreciation in value when their ownership position is bought out in the future.

The three generations described above assume an acquisition model where a high net worth individual purchases a company for their own direct management. These type of transactions are common for deal sizes between $1,000,000 and $10,000,000. However, at approximately $5,000,000 another group of buyers enters the market. These buyers are entities rather than individuals. Entity buyers in deals successfully facilitated by IBA include privately held companies, publicly traded companies, private equity firms, and non-profit organizations. The lifespan of many of these entities is perpetual. The following article identifies some of the most founder friendly private equity firms in operation in the United States (https://www.inc.com/magazine/201908/graham-winfrey/private-equity-investment-firms-founder-friendly.html). An example of a non-profit organization that has purchased a company in an IBA facilitated transaction is Northwest Center (https://www.nwcenter.org/). Northwest Center was founded in 1965. I expect the organization will celebrate its 100 year anniversary in 2065.

In addition, to the above domestic buyer groups, 1^st generation immigrants are regular acquirers of businesses in the United States to facilitate immigration and/or entering the economy at an appropriate level based on their knowledge, experience, management ability, and capital resources. It is easier for many of these individuals to secure an executive management position through acquisition than to get hired by Amazon, Microsoft, Boeing, or Nike, especially when English is not a first language.

90% of IBA clients are selling their businesses because they want to sell, not because they need to sell. It is my recommendation to all entrepreneurs that they continue profitably doing what they enjoy until they are emotionally and mentally ready to sell their businesses. A robust marketplace will be present today, tomorrow, and in the foreseeable future for the sale of their companies. Similarly, IBA, like Mt. Rainier and Mt. Hood, rising above Seattle and Portland, will also be available to professional facilitate the sale in 2020, 2030, and 2040 like we have for Pacific Northwest entrepreneurs since 1975. There is no replacement for stability, knowledge, and experience in a professional advisor.

Gregory Kovsky, the President & CEO of IBA since 2000, has personally facilitated over 300 transactions involving privately held companies. He is recognized nationally for his knowledge & experience as a “sell side” broker in the manufacturing, international import, industrial, marine, construction, technology, and horticulture industries and a commonly published author and seminar speaker. Mr. Kovsky has held a real estate brokers license in one or more states since 1994 and has the ability to comprehensively represent entrepreneurs in the sale of their privately held companies and commercial real estate. He is honored to represent IBA as a member of the Seattle chapter of The Professional 50 along with Bill Southwell, and have Stephen Cohen represent the firm in The Professional 50 chapter in Portland.

Contributed by Gregory Kovsky