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Attention Business Owners - I’ve been on my high horse for a few months now regarding the many ways business owners shoot themselves in the foot when it comes time to sell their companies. To be blunt, my take is that sellers screw up their deals more often than they get it right. Google Stock The other day I finally stumbled upon some proof of this — anecdotally at least — during a conversation with a former private equity director. Today, she’s an investment banker but for years before that, she was a private equity managing director working to acquire lower middle market companies like yours. Here’s what she told me: “I rarely got near the ‘authorized amount’ when I closed a deal with a lower middle-market business owner.” What does that mean? It means that after buying companies for almost two decades on behalf of a private equity firm, she rarely paid as much for a business as she was authorized to pay for. What does that mean? Picture this: you’re a private equity managing director. You and your colleagues find a business you want to buy. The fund’s “investment committee” discusses the opportunity and directs you to go as high as $20 million to buy the business. That’s the “authorized amount.” MORE FOR YOU Now, you begin negotiations with the seller—the business owner. If you’re authorized to go to $20 million, you might start with $7 million to see how the seller responds. Maybe you have to go to $8 million or $10 million. Here’s what she told me that blew me away: Not only did her negotiations with business owners rarely go to the level of the authorized amount (in this example, $20 million), they rarely went to the level of 75% of the authorized amount ($15 million). In fact, she said it was common for the deals to close between 50% and 75% of what the investment committee authorized the fund director to pay. That means most business owners leave between 25% and 50% on the table! That’s nuts! When I asked around to confirm her experience, most bankers agreed (reluctantly, I would add — this is not the kind of thing they want getting around). How is it possible that a savvy business owner who knows every nook and corner of their own business can be so wildly off base when it comes to valuing the business? Arrogance, I’m afraid. When a business owner builds a business doing $10 million, $50 million, $200 million in revenues, they can be forgiven for having tremendous faith in themselves. But when it comes to negotiating their exit, most are way over their head. A business owner who represents himself in the sale of their company is no different than a lawyer who represents themselves in a trial. And you know the saying, “a lawyer who represents himself has a fool for a client.” I wrote about what investment bankers do in a previous column but now I am appending to that article the math on why using an investment banker can make a lot of sense (and score you a lot more money). Two scenarios: Scenario 1: You sell your $20 million company (remember, that’s the “authorized amount”) for $15 million (that’s on the high side of the 50-75% figure that she says she usually closed on in her deals). Your investment banker collects 5%, or $750,000 as a transaction fee to represent you, netting you $14.25 million Scenario 2: You sell your $20 million company for $18 million (let’s assume your investment banker doesn’t get the fully authorized amount but gets closer by virtue of their market insight and experience). Your investment banker collects 5% or $900,000 as a transaction fee, netting you $17.1 million. $17.1 million? Or $14.25 million? Is your self-reliance and dislike of investment banking fees worth $2.85 million out of your pocket? The question answers itself. Closing Note: For those of you who think that your deal team (investment bankers, lawyers, accountants) are the only source of truth as you navigate your sale, I’d like to invite you to experiment with our new AI-powered private deal platform introduced in “8 Deal Points Every Business Owner Should Know — And Fight For — Before They Sell Their Company” — completely free, from Birthing of Giants. Editorial StandardsReprints & Permissions
