“Approximately 24 percent of listed businesses sell in any given year… and only 20 to 33 percent of listed businesses end up getting sold at all.”
Most business owners wish to sell their company at some point. Fear of the unknown leaves them overwhelmed and paralyzed from acting. “Where do I begin?” and “who can I trust?” are frequent headaches echoed by lower and lower-middle market business owners. Business brokers are frequently the refuge of overwhelmed business owners, and unfortunately, often lead these owners to more considerable frustration. While business brokers can be useful in the micro-market, they generally lack the education, skill set, tools, resources, and experience required for an optimal sale of many closely-held businesses.
The lower and lower-middle market mergers and acquisitions (“M&A”) advisory industry consists of several intermediary types. An intermediary is a person or company that serves as a liaison between you and a buyer and can be a CPA, investment bank, or a business broker. Because no license is required to be a business broker or lower-market intermediary, the industry contains a wide variety of individuals ranging from finance professionals to realtors. Consequently, the vast array of choices exposes business owners to significant risk if one enters into a contract with an intermediary not suited to market and sell the owner’s company.
Stone Capital Consulting has created this guide to assist you in distinguishing the notable traits of (the few) skilled intermediaries from the predominant population of business brokers.
The Stone Capital Model vs. Business Brokers
Stone Capital Consulting is a St. Louis-based, exit-planning firm that specializes in Mergers & Acquisition Advisory and Exit Strategy for lower and middle-market companies. We prepare our clients for an exit that will maximize their value, terms, and objectives by offering professional business valuation services, financial & operational analysis, risk management, market readiness, industry trends, market timing, and exit strategy guidance. At Stone Capital, we leverage our team’s 70+ years of experience to develop tailored strategies that guide our clients through the succession process, starting from the education and discovery phase to preparation, due diligence, and the execution of a successful exit. We stand apart from other firms in the industry by using a proprietary process that delivers wall street quality resources to main street businesses – a comprehensive and consultative approach not found in the markets we serve.
To best identify the differences between Stone Capital Consulting and business brokers, you first need to understand the business brokerage industry.
The Business Brokerage Model
The business brokerage industry best serves the micro-market or companies with transaction prices below $500,000. Micro-market businesses have little, if any, intangible value. As such, unsophisticated valuations using rogue methods, such as rules of thumb, are prevalent within the business brokerage community. Because micro-sized companies, in general, offer commoditized products and cannot scale, the industry is quite similar to the real estate industry. To be sure, business brokers use a realtor-like model for marketing their listings. A typical business brokerage client engagement is as follows and is called a passive strategy.
The client signs a brokerage agreement with the business broker.
Once signed, the business broker prepares a one or two-page advertisement that provides prospects general information about the company, as well as the list price.
Following the realtor model, the business broker will usually list the company on a website, such as bizbuysell.com.
What happens next depends on the business broker, but given the grim statistic of roughly one-fifth of listed companies selling, the industry standard isn’t surprising. Our experience of working in the intermediary market allows us to provide an overview of what we’ve seen and the unfortunate reality that many business-brokerage clients face.
To entice a business owner to sign a brokerage agreement, the broker proposes a high sales price. Professional business valuation is an advanced skill set that almost no business brokers possess (see the “Valuation” section on our website). Enticed by the unrealistic price, the business owner signs the brokerage agreement, which presents another problem. Nearly all intermediary sell-side agreements contain a tail provision. Bound by a tail provision, the business broker is now entitled to their full commission for a stated time – usually 24 months – after termination. Stated otherwise, the business owner can terminate the contract with the business broker. If the company is sold within 24 months of ending the agreement, however, the business broker is legally guaranteed 100% of the success fee.
Let’s get back to the process. Following the execution of the brokerage agreement, the business broker will create a one or two-page advertisement of the business. From our experience, most broker listings are poorly constructed, with a large number containing improper grammar and spelling mistakes, but moreover, the advertisements fail to market the business effectively. The advertisement will be sent to a list of contacts the business broker has accumulated, called an email “blast.” Blasts are rarely successful in finding an interested and qualified buyer. Instead, these blasts expose the company to “information leakage” to the company’s competitors, employees, and other stakeholders, that the company is for sale.
Next, the business broker lists the company on a realtor.com-like website, such as bizbuysell.com. Information from the email advertisement is copied to bizbuysell and posted for all to see. Viewers can contact the business broker to learn more about the company, but after the listing, the business broker’s marketing efforts have ended – at least for the business.
The business broker’s next move is to find another listing. Remember, only one-fifth to one-quarter of listed businesses sell. Increasing the number of listings in business brokerage theory improves the success rate of any given company selling.
Passive strategies rely entirely on willing-and-able prospective buyers to find the listed business and to contact the business broker to move the marketing effort forward. With few willing-and-able buyers in the marketplace, and even fewer passively searching websites for deals, the probability of an overpriced listing ever closing is remote, as evidenced by the abhorrently low rate of listed companies selling.
A Successful Sale Starts with an Active Strategy
Business brokerage firms typically employ salespeople – lacking substantive foundational experience and knowledge – whose goal is to increase the business brokerage firm’s number of listings. Stone Capital, on the other hand, has more than 70 years of combined experience in valuation, sales, finance, tax, marketing, management, and risk management. We leverage our expertise to provide a comprehensive and tailored active strategy to your exit planning process. Now that you’re familiar with the business broker model visit the Our Process page to learn how Stone Capital differs from the business broker model and why it benefits you.