I’m writing to you from Chicago, where I have come to meet with Diane Niederman from Alliance of Merger & Acquisition Advisors (AM&AA).  AM&AA is the industry association of mid market mergers and acquisitions professionals. These are the guys who sell companies with revenue between $5 million and $500 million.

Since I’ve been flogging my new book, I’ve met a number of the “intermediaries” that lubricate the sale of a private business. What a fascinating cast of players. From what I have gathered, business brokers specialize in selling small companies with less than $5 million in revenue – most less than $2 million. Their trade group is called the International Business Brokers Association (IBBA).  Right now business brokers are getting 2-3 times Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for a good little business.

One step up the food chain from the business broker is the mid market Merger & Acquisition (M&A) professional. These are the individuals who sell businesses worth somewhere between $5 million and $100 million. Still considered “down market” from their investment banking brethren on Wall Street, the mid market M&A professional usually demands a retainer up front and a percentage of the sale price. If business brokers are the Chevy of the intermediary world, M&A professionals are the BMW (investment bankers are the Porsche). Right now, with bank leverage all but gone, average mid market M&A deals are going for 4-5 times pre-tax profit less any debt. The AM&AA or The Association of Corporate Growth (ACG) are both good places to find an M&A professional.

Like a lot of industries, professional pride and jealousy see to demarcate hard black lines between business brokers and M&A professionals when actually the line is a lot more blurry and grey.  From the people I’ve spoken with, and from my own personal experience, the trick to finding an intermediary to sell your company is to pick a representative for whom you will be neither their largest nor their smallest deal.  If you own a Subway franchise in Kansas City that generates $400,000 in revenue annually, a business broker will best serve you.  If you own a Microbrewery in San Francisco with $18 million in revenue, you’ll be best served by an M&A professional.

Do you have your own opinion about what separates an M&A professional from a business broker? What advice do you have for a business owner looking to find a representative to sell their company? Please share your thoughts and advice in the comments box at the bottom of this post.

Last week I wrote three articles that I thought you might find interesting:

Statistics key to business as well as hockey

Originally published by The Globe and Mail March 9, 2010

Decision makers love statistics. If you’re the general manager of an NHL team and your job is to find the next Sidney Crosby, you want to show up at the draft with all the statistics possible for each player you are considering: number of goals, assists, penalty minutes, plus/minus ratio, playoff performances.

Prospective buyers of your business will also need to see your statistics. And sales is among the most important. Buyers will want to understand your secret for getting customers and at what rate you turn prospects into customers. That will help them see how much your business is worth in their hands. The key is to have a long-term track record of statistics you can point to, so start tracking the following now:

Qualified leads rate
A qualified lead is someone who has the capacity and interest to buy what you’re selling, and the qualified lead rate is the number of people you have engaged in a dialogue as a percentage of the total target market. Let’s say you own a consulting firm that targets large enterprises in your city. You estimate there are 100 potential customers in the local area that could handle the $250,000 you charge customers for your unique offering. If you win face-to-face appointments with 20 leads, then your qualified lead rate is 20 per cent.

Close rate
Your close rate is the percentage of qualified leads that you end up closing in a given period. If the consulting firm closed three of the 20 people it met with, its close rate on qualified leads is 15 per cent.

Most business owners know these stats in their head, but it’s important to start documenting them regularly so you can point a potential acquirer to historical patterns. A prospective buyer will take your stats and project your performance onto his or her footprint.

To continue the hypothetical consulting firm example, imagine that a large global consulting firm with 27 offices that collectively target 3,000 large-enterprise customers is considering purchasing your business. It is going to graft your qualified lead rate and close rate on its 3,000 businesses. If it too is able to win face-to-face meetings with 20 per cent of 3,000, it is likely to get 600 qualified leads. If it too is able to close 15 per cent of the people it meets with, then it can expect to enjoy 90 new customers spending $250,000 each for a total of $22.5 million. Most companies have a pretty good idea what they are willing to pay to acquire $22.5 million in new business.

Track your sales stats like a hockey player’s are monitored, and you’ll have a much better shot at getting paid like Sidney Crosby.

The earn-out horror show

Originally published by The Globe and Mail March 10, 2010

When you sell your business, you’ll likely have to accept part of your compensation in the form of an earn-out.

An earn-out is an arrangement where the buyer agrees to pay an additional sum of money (or some other currency like stock), contingent on the business meeting a set of goals in the future that are typically tied to profit, revenue or customer retention. Sometimes referred to as “golden handcuffs,” earn-outs are designed to keep you motivated for a few years after you sell.

Earn-outs have worked out well for some sellers, but they are often a point of frustration for an entrepreneur selling his or her business. The problem is that the earn-out is “at risk”—that is, it is in no way guaranteed. What’s more, the buyer has a number of disincentives to frustrate your ability to meet the earn-out goals:

• The buyer wants to minimize the price paid for your business, and you want to maximize it.
• The minute you sign the share-purchase agreement, the incentive for the acquiring company to help you hit your earn-out is gone. Would you actively help Starbucks find ways to charge you more for your coffee? Some buyers unconsciously hamper your ability to succeed, others can be downright hostile.
• The buyer wants to integrate while you want freedom to operate.

When an acquiring company buys your business, it usually wants to integrate (at least the back office) with its own operations. That looks reasonable in print, but almost all efforts to integrate your business will frustrate your ability to hit your earn-out.

Take a simple issue such as salesperson compensation. Your system has worked for years, and you’re keen to keep it for the duration of the earn-out. The acquiring company, however, wants you to move your employees to its sales-compensation model. Instantly, you have a mismatch of objectives: The buyer wants control, and you need autonomy.

Entrepreneurs I know have been successful by remaining flexible, bobbing and weaving as they make their way along. You thrive on creativity and innovation, and the acquiring company thrives on process. You need autonomy to operate, yet it requires rules to be followed.

Your broker will be quick to tell you about entrepreneurs who have done well by accepting an earn-out, but ask 10 business owners who have lived through it, and nine will recount an earn-out horror story. Ultimately, most earn-outs end before their time, with the entrepreneur leaving or being removed or the buyer agreeing to an early exit for the entrepreneur.

You’ll likely have to accept some form of your sale price as an earn-out. However, walk away from the offer if the cash you negotiate on closing does not meet the minimum you are willing to accept to give up your business.

Seven ways to avoid an earn-out

Originally published by The Globe and Mail March 11, 2010

The risk–reward continuum associated with buying and selling a business works the same way as a see-saw.

On the playground, if an older kid gets on one end, the younger, smaller one shoots to the sky. If two kids are roughly equal in weight, they can have great fun together.

When you sell your business, you want all of your cash up front, putting the risk in the hands of the buyer. When you buy a business, you want to put up as little cash as possible in favour of paying for results in an earn-out—the risk then sits in the hands of the seller. If a potential buyer sees your company as risky, he or she won’t want to play. A deal gets done when a compromise is made somewhere in the middle—when both parties strike a balance between risk and reward.

The trick to getting a higher portion of your proceeds up front is to minimize the risk that the business will fade when you leave. Here are seven things you can do to get more of your money up front:

1. Get your customers to sign long-term agreements.
2. Track your repurchase rate to demonstrate a recurring revenue stream.
3. Document your systems for making your product or service.
4. Give key employees a long-term incentive plan that ties them to the business after the sale.
5. Track your sales pipeline, qualified lead rate and close rate.
6. Delegate your personal accountabilities to key managers.
7. Write down your secrets for generating qualified leads.

Most acquirers will insist on some form of earn-out or “golden handcuffs.” Your job is to get as much cash up front by reducing their risk—making that see-saw as balanced as possible.