The Banker’s Rolodex Doesn’t Matter – And Other Things I Wish I Knew Prior to Selling
Ever since selling my company, I’ve had dozens of conversations with entrepreneurs around the subject of selling. As it turns out, just about every entrepreneur has dozens of questions, but is often afraid to ask them: How’d you do it? Where’d you start? Would you do it again?
Looking back, there are a few things I wish I’d known prior to embarking on the sale process. So, whether you are creating your investment memorandum now or just planning for years down the road, I hope these experiences will help make some of the decisions around selling your business a little easier.
For Sale by Owner – Save it for Your House
Initially, my business partners and I weren’t sure whether to hire a banker. Looking back, I am 100% confident we would not have received the same valuation – or even closed our deal – if we had gone without representation. It’s natural for entrepreneurs to want to do it themselves; after all, this is how many of us run our companies. Knowing what I know now, there are three main reasons that I wouldn’t do it myself:
- It’s a Full-Time Job
Selling a company is a lot of work. If you miss your numbers or otherwise impair your company prior to closing because you’re working on the sale process, it will hurt your valuation. As we got into our process, we were spending much of the day on the sales process, and that was with representation. I couldn’t imagine having to put together initial decks, create financial models, organize diligence materials, build the buyer list, set up calls, etc. There just isn’t enough time in the day.
- You Are Likely Dealing with Sharks
I can say that with near certainty because most entrepreneurs are talented at a specialized set of skills that don’t necessarily include negotiating transactions. Many financial and strategic buyers are doing dozens of deals per year and seeing hundreds. It wasn’t long after talking to a few companies that we realized we were minnows swimming with sharks.
- It’ll Make You Look Mickey Mouse
Selling your own business can damage your credibility. If you’ve got an amazing CFO with lots of extra time, your company might prove to be an exception to the rule. In most cases, however, it just seems wrong to not want to have the right professionals back you up. You wouldn’t do the tax structure yourself, and you wouldn’t play lawyer and do the purchase agreement on your own, so why leave what is arguably more important, the negotiation of the key terms, to chance?
In general, you’ll find that an advisor can add a lot of value in these key areas; one that doesn’t is probably the wrong advisor.
It’s All About Competition
I’ve heard many stories from guys who get approached by a strategic buyer and jump in head-first. Sometimes it works, but more often I hear the painful story of a failed deal. Your business is like any other asset: Its true price will only be discovered if there are multiple parties looking at it. We got LOIs that ended up being one-third the amount of our final sale price. What would have happened if we’d gotten into bed with one of those potential acquirers right from the start?
Competition isn’t just about valuation though. I’d argue that the deal terms are more important than the headline number. Everybody likes the press release with the big shiny figure, but all of the entrepreneurs I know also care about what happens downstream with the employees, the product, and in our case, the community.
One thing our banker did to maximize value during our deal process was to keep the deal non-exclusive for as long as possible. This meant that we were actually negotiating sale agreements with three parties at the same time. The potential buyers clearly didn’t like this, but it helped our legal team immensely in protecting our company and getting favorable terms. The decision to go non-exclusive was not an easy one. It was a calculated risk and one that I think can only be made when you’ve run many processes. This is one of the areas where an advisor’s experience and instinct were really beneficial.
The Banker’s Rolodex Doesn’t Matter
I haven’t had a Rolodex in more than a decade, so maybe I should be saying that “LinkedIn doesn’t matter.” The point is that the bankers seem to focus heavily on the idea of being able to open doors. My business was in the advertising industry, so I get the value of perception, but in my experience this actually isn’t that important.
This is not to say that a banker doesn’t have the experience to build a book of potential acquirers; they can. Rather, it’s that I don’t think there is a huge competitive advantage between one banker who claims he’s got the connections that others don’t. When we ran our process, we got about a dozen management presentations with pretty much every firm we wanted to meet, and then in-person meetings with six to eight of those. Each time, it was with the CEO/CFO combo or sometimes a committee of a larger group. The truth is that for middle market companies, any banker can get the right guys on the line.
So what does matter then? I’d argue that negotiation is one skill that is way underrated when selecting an advisor. It’s tough because it is a nebulous and often qualitative characteristic. Successful entrepreneurs like to think they’re good negotiators because we negotiate with employees, customers and suppliers all the time. But think of it like that special negotiator who has the job of dealing with a kidnapping situation; I don’t know about you, but I wouldn’t know where to begin with a situation like that. I think the same concept (albeit less extreme) can be applied to negotiating a sale. There are tangible strategies behind the scenes that come from experience and training. That’s training and experience most entrepreneurs just don’t have.
The best way to assess this quality in an advisor is to talk to references. Ask about specific scenarios related to the process and how a potential advisor handled the situation.
In summary, I wish I’d known the following things when I sold my business:
- That the surest way to leave value on the table would be to not hire a banker. The decision-making process should be how to choose the right advisor, not whether or not to have one.
- In our deal, we created the most value through competition and non-exclusivity.
- I would not hire a banker who claimed his advantage was relationships or contacts. Instead, look for other differentiating factors like negotiating skills.
While I could probably write a book on our experience – there are many other factors – I hope that these three key points will benefit you in your process. Good luck!
Cory Janssen is the former co-founder of Investopedia, a financial education company that was sold to Forbes Media through Arbor Advisors. He’s currently back at it with a number of new Internet properties, including Techopedia, Divestopedia, Safeopedia, among others.