Over the past several years, there has been an uptick in the market for contracting companies. This has been spurred in part by private equity, which has discovered home services and is finding it attractive. While every exit is reason for celebration, too many contractors sell for less than they could get. Here is how you can maximize the price of your business.
Excluding the sale of business to family or employees, there are three ways to sell a business. The first occurs when someone calls you out of the blue and offers to buy your business. Second, you can market it to potential buyers yourself. And finally, you can enlist the aid of professionals to market and sell your business for you.
GETTING A KNOCK ON THE DOOR
Someone calls you out of the blue and offers to buy your business. Before now, you never really considered selling. You listen because it’s flattering, and you wonder just how much the buyer is talking about. After some questioning, he floats a range out there. Holy cow — it’s a lot of money!
You start thinking about it. No more angry customers. No more whiny techs. No more office drama. No more cash flow concerns. You could golf every day. You consider it, but should you?
If someone knocked on the door of your house and made you an offer to buy your home, would you take it? The amount of money may sound pretty good, but is it a fair market price? Is someone out there who is looking for a house just like yours and who will pay more than the fair market for what he wants?
You are unlikely to know if an unsolicited offer for your home or for your business is a fair market price. You are certainly unlikely to know if there is a buyer who would offer more than market.
PUTTING IT ON THE MARKET
You decide it is time to sell, so you list your company on a few business-for-sale websites. You confidentially let your manufacturer territory manager know you are thinking about selling. You quietly spread the word in the business community, hoping to keep your competitors in the dark about your actions, even though one of them might be a potential buyer. Then, you wait. And you wait. And you wait some more.
If someone responds, it is almost like getting a call out of the blue. You do not know the market. You just know that no one has shown interest and now someone is interested. It becomes difficult to keep the desperation out of your voice.
When you market your business yourself, it is similar to sticking a “For Sale by Owner” sign in your front yard and trying to sell your house. Hopefully, you will get interest from a couple of people so you can play one off against the other. In a hot market, you might get multiple offers, but the odds are you will be approached with one interested party at a time, where you must negotiate from a position of weakness.
GETTING PROFESSIONAL HELP
Another approach is to hire an investment bank. Large investment banks help companies with initial public stock offerings, corporate bond sales, mergers and acquisitions (M&A), and other complex financial transactions. There is a limited number of large investment banks, but thousands of small ones. Many of the small banks do little more than M&A. In this role, they will package a company for sale and guide the owners through the sales process.
Selling businesses is what investment banks do. They do it often. They are good at it. Chances are, selling a business is not something you do often, so you are probably not that good. Doing something unfamiliar and complex on your own for the first time is a recipe for mistakes. Mistakes in the sale of a business are expensive.
Most people engage a real estate agent when it is time to sell their homes. The real estate agent knows how to package the home to sell, knows what the current trends are for updating and staging, and has access to multiple listing services to present a home to as many potential buyers as possible. Similarly, investment banks know how to market your business.
When you sell a house through a real estate agent, you will pay a commission. You will also pay for any needed updates and repairs to help the house sell for more and to sell faster. Similarly, investment banks will charge you for the work they do to market your business and collect a commission on the sale. In both cases, the commission is free to the seller because the seller gets more money net of commissions with the help of professionals than without them.
NOT ALL INVESTMENT BANKS ARE EQUAL
Large investment banks tend to sell large businesses. If you are selling a $500 million company, there is a limited number of realistic prospects, so they can be targeted directly in a rifle shot approach. Many small investment banks follow this approach with small businesses. But there isn’t a limited number of prospective buyers for small businesses. There is an abundant number of prospects, including prospects you might never have considered.
The best investment banks for small business target everyone. They use a saturation approach. They do not presume to know who may or may not be a buyer.
While some investment banks and even a few M&A advisory firms will reach out to hundreds of private equity firms and companies, the best investment banks contact thousands of private equity firms and thousands of companies. Their ultimate goal is to create an auction where buyers try to outbid each other.
Unfortunately, the only way to know what approach an investment bank takes is to ask how they go to market. Fortunately, investment banks are easy to find. They are based in every major market in the country. List yourself on investment bank matchmaking sites like axial.net, and they will find you. Take your time choosing the right investment bank. Get to know several, and choose the one that seems to be the best fit.
To learn more about how investment banks take companies to market, join the Service Nation Alliance and attend the October Alliance Day, immediately prior to the Service World Expo in Las Vegas.
Publication date: 7/8/2019