Business brokers and M&A advisors have 100% customer churn by definition
The amount of “advice” online for founders considering exiting a technology based business is mind boggling. Most of the advice we’ve seen is published by M&A advisors which is in our opinion biased from the outset. The reason is that these advisors earn their fees from the sale of the business. Since the fees are usually a percentage of the purchase price, it would seem logical that they would be aligned with the founders in terms of maximizing the sale price.
In reality however, around 80% of businesses that are listed brokers don’t get sold. The reasons range from unrealistic valuation expectations to inability to get the business in front of the right strategic buyers at the right time. As a result business brokers and M&A advisors work hard to get as many listings into the top of the funnel as possible in order to maximize their change of a conversion. A lot of “advice” you’ll find online is designed to get you to list with a broker. The approach to onboarding and service takes into account the fact that you will churn out of their funnel within the next couple of months whether they sell your business or not.
What are some of the options to maximize value?
The first step is to understand where your company stands in the universe of potential acquirers. This will vary depending on your size, growth rate and industry as well as factors such as how easy or difficult an acquirer will find it to manage the technology and processes and sustain the growth you’ve achieved so far.
Strategic Acquirers
The reality is that strategic acquirers will almost always be the highest bidder if they are interested. The reason being that they can integrate your company into their existing operations realizing substantial operational savings (read fire/re-deploy your team). This leads to increased profit margins from your company's revenue relative to what you were making.
Of course there are a host of strategic reasons why such an acquirer may want to acquire your company including entering new markets etc. If your company represents a new market for them, they are more likely to retain the team.
Since you are in the market, you are more likely to know who the acquirers would be than a broker, so it may make sense to approach them directly in this case. This excellent article by Mark Doust of Quiet Light Brokerage (one of the best in our opinion), sets out some of the things to think about.
Non-strategic Acquirers
Sell to management
Selling the company to the team can be a good option when your technology is hard to transfer but the company is profitable. A management buy out can be financed by a seller note (where they pay you out over time) or via debt financing in some cases. Recent changes to the SBA rules make raising low cost capital to do this more practical. If you’re considering going this route, you’ll need to think about the financing structure carefully because the choice of structure has important tax implications.
Sell to private equity (EBITDA>$5 million)
Private equity is a good option for larger companies. In our experience, companies with over $5 million in EBITDA get the best traction, often getting multiple offers if growth rates are high and churn is low. Some private equity companies will go lower than $5 million in EBITDA. The downside is that (most) of these buyers purchase the company solely with the intention of making a profit within the life of their fund (8 to 10 years). Since many of their investments won’t exit in this timeframe, they place high emphasis on rapid profitability growth (read firing your team/offshoring developers/plastering your website with click-bait etc. etc.).
Sell to entrepreneurs (EBITDA $250k to $5 million)
There is a growing community of acquisition entrepreneurs who may be interested in buying your company. These people (ourselves included) are typically previous startup founders or business operators who don’t want to start a company from scratch but have the funds and desire to pursue an entrepreneurial journey. Founders can get burned out, want to start a new project or have a family or health crisis that forces them to reconsider their priorities. In this case it makes sense to transfer the business to entrepreneurs who will take the reins and do everything in their power to take the business to the next level of growth.
Some investors in this space are looking to acquire and grow a single business for the long term, whilst others are more interested in rapid growth and “flipping” your company.
If you can find the right entrepreneur to take over the reins the main advantage is that you get liquidity at the time of sale, but the company (and your team) get to continue growing.
How Mitchell Street Capital help?
Mitchell Street Capital is a buyer of software, ecommerce and Adsense businesses with EBITDA between $0.5 million and $2 million.
We are entrepreneurs who acquire and grow businesses for the long term. Having been involved in M&A and tech for 2 decades, we have a strong network of contacts so if your business is not a fit for us, we’d be happy to refer you on to investors who we think would be interested (they do the same for us).
We’ll give you our unbiased view on the best route to value in your circumstances. We’d also be happy to give you our opinion on which M&A advisors or business brokers are best positioned to help you given your size and industry.
Contact us to set up a confidential, no-obligation discussion about your succession objectives and how we can help.
daniel at mitchellstreetcapital dot com