Myth Busting: Top 5 Reasons Biz Sellers Don’t Hire an Advisor
A lot of business owners out there think they can go it alone when selling their business. Many of them are successful … but many of them can leave a substantial amount of money on the table.
We’ve seen this many times as we’ve had a number of clients who were ready to accept an offer, but at the urging of their attorney or financial advisor, brought us into the process. In several instances we’ve been able to increase the final price versus the initial offer by 60 to 90%.
That’s not because we are geniuses or financial wizards, but because we run a disciplined, organized process that keeps potential buyers honest, introduces alternative bidders or the threat of potential bidders, and helps to ensure that the terms of an offer make it to the closing table without leaking oil.
It’s understandable for some business owners to think that they’ll save money with the DIY approach, while others think it will be as easy as selling a house. However, here are the five biggest reasons why business owners think they don’t need an advisor to sell their business — and why these myths are worth discussing.
Myth 1: It’s like selling a house, which I’ve done.
Selling the business you’ve spent the better part of your life building is a once in a lifetime experience. Would you trust a sale of this magnitude to someone who has never sold a business before? In most cases, that would be you.
On the other hand, this is not an advisor’s first rodeo. Seasoned advisors have decades of experience and numerous transactions under their belts. If you want to leave nothing to chance in this one-shot transaction, it pays to go with a pro.
From a practical perspective, do you have both the time and the expertise not only to secure the highest value for your business, but to get the transaction over the finish line? Have you identified the best time to sell your business? Do you know how much your business is worth? And will you be able to identify the red flags that may derail the deal? An advisor can help you with all of the above.
Consider also the time commitment. Do you have the bandwidth to run your business while also marketing and pitching your business? Fielding offers? Completing due diligence when a buyer brings in Price Waterhouse to perform a three-week “Quality of Earnings” review of your unaudited financials.
And then there’s everything from customer concentration analysis to legal issues to environmental compliance. The average sales process takes six months and often feels like a full-time job.
To get a glimpse at what’s involved, flip through our Guide to Selling Your Business eBook. Spoiler alert: It’s 93 pages long.
Myth 2: An advisor will scare off a buyer.
We hear this one from sellers a lot, but they’re usually surprised by the reality. To buyers, it all comes down to optics, and the day-to-day experience of the sales process. As a managing partner of a private equity firm likes to say, “If we’re negotiating with an owner, and he doesn’t have a seasoned advisor … it’s probably not the first bad decision he’s made.”
An advisor’s job is to thoroughly understand a buyer’s objectives, and to present your business as the ultimate vehicle to achieve them. They’re responsible for keeping the lines of communication open with buyers in a way that’s clear, credible and consistent. When a buyer deals directly with the seller, the process is often a lot slower, less consistent and at times frustrating.
Don’t believe us? Recently, we sold a company to a buyer who turned around and called us back six months later when he wanted to buy another company. The frustrated buyer referred the new seller to us and told him he needed our help. In his own words, “I told him he needed to hire an advisor to get him through this process, or he wouldn’t be able to do it on his own.”
In this case, not only was the buyer not scared off by an advisor — he enlisted our help on behalf of the seller. An advisor makes the whole process as seamless and efficient as possible, for both the buyer and the seller.
Myth 3: A good accountant and attorney can handle it.
A lot of people think that selling a business is just another transaction that simply boils down to the numbers. Hand over the internal financials and tax returns to the buyer and he’ll make an offer. Then take the offer to an attorney and he’ll put together the Stock Purchase Agreement.
If only it was that simple.
The truth is, there’s a lot more to it than that. A company’s financial statements and tax returns typically underestimate the true cash flow or EBITDA (Earnings Before Taxes, Interest Depreciation and Amortization). An experienced advisor knows how to present your financials on an “Adjusted “ basis to account for one-time items like a bad debt write off, a week of sales lost to a snowstorm, personal expenses or family members on the payroll, etc.
And advisors do a lot of heavy lifting that goes well beyond crunching numbers. They can help you determine — and achieve — your specific goals, from financial targets to the treatment of your employees. A good advisor will also drum up competition to get you the best price, then narrow it down to the right buyer for your business.
Beyond their invaluable experience structuring and negotiating transactions, advisors bring to the table a deep understanding of your objectives, a good bit of judgment, and the insight to know what motivates different types of buyers.
Myth 4: My financials and tax returns are in good order (and don’t need adjustments).
Sometimes the numbers don’t actually tell an accurate story. When looking at historic earnings, for example, unexpected upheavals like the Covid pandemic may throw otherwise sound financials out of whack.
Take the case of an electric contracting company client. Several of the company’s electricians regularly served a pair of prominent manufacturing plants on a daily basis. When the pandemic hit, both companies enforced a policy that non-employees could not enter the plants, including outside contractors. So for nearly two months, those long-standing jobs weren’t on the electric company’s books, which temporarily impacted its revenue and earnings stream.
An advisor can account for these types of anomalies. In this case, FourBridges advisors looked at the billable hours these electricians booked the three months before and the three months after the stoppage — and added the average back to the “Adjusted Financial Statements” in a memorandum, which was accepted by the buyer and resulted in an increase in the final purchase price.
The same type of adjustment was made to a retail company in 2020-2021 when Covid-driven supply chain issues temporarily skyrocketed the cost of a shipping container from overseas from $5,000 per container to $22,000 per container. In both cases, adjustments prevented the sellers from getting a lower valuation and smaller multiple due to non-recurring situations that reflected a once-in-a-lifetime disruption.
Bottom line, if you don’t know how buyers are thinking and what they’re looking for, you could easily leave money on the table.
Myth 5: I don’t want to pay a retainer fee.
It’s natural to think that way. But as opposed to paying your doctor or dentist for a visit, most financial advisors receive 95% of their compensation if and only if a transaction closes. A modest monthly retainer ensures that clients are serious about selling and are engaged in the process such that they provide important information on a timely basis that enables the advisor to create a memorandum and engage potential buyers.
Our clients will back us up on this one: using an experienced advisor pays for itself. Maybe you already have a solid offer on the table, so why hire an advisor? What if a bidding war could drive the price higher? That’s where an advisor comes in.
In one case, a client had an offer on the table for $18.5M and was reluctant to hire an advisor for fear of scaring off the buyer (see Myth #2). However, when we introduced another buyer to fuel the competition, the original buyer increased their offer three different times to nearly double the sales price to $36 million.
We’ve seen this story play out time and again. In another case, a client came in with an offer of $20M from a private equity firm. After we brought in a dozen more potential buyers, the seller received four offers over $30M and walked away with a final valuation of $39.5M.
More Than a Transaction
There are countless benefits of hiring an advisor to guide you through the sale of your business, including one that a lot of sellers overlook. This is likely one of the biggest decisions you’ll make during your lifetime, and it can be a bit of an emotional roller coaster.
Have you considered what your new reality will look like after you step away from your business? Or where you’ll find fulfillment and purpose? A good advisor isn’t just there to help you get the highest purchase price for your business. They’re your partner through a monumental change that you’ve been working your whole life for.
Thinking of selling? We’d be happy to talk you through it. Get in touch.