Who do you contact to sell your company?
Sell side advisors are companies specialized in selling companies. They will help you find multiple potential buyers and advice you what to do in each step of the process. A sell side advisor uses their network of contacts and knowledge to support you. They tend to specialize in a specific geography or sector.
What should I expect if I want sell my company?
First of all, expect at least 6 months, probably more, of work to sell your company. It takes about 3 months on average to buy a smaller sized company. If you are on the sell side, however, there is preparation work as well, adding the additional 3 months. The overall process, if you use an advisor, is roughly:
- Contact sell side advisor and estimate what your company could approximately be sold for.
- Create a list of potential buyers, a 1 pager describing your company (anonymized), and a longer CIM (Confidential Information Memorandum) with more details on financials, team, and customers.
- Circulate the 1 pager to a broad set of potential buyers. Then circulate the CIM to the ones showing interest.
- Set up multiple calls with each potential buyer to walk them through financials, product, and get to know them.
- Start bidding process between buyers. They won’t know who the other potential buyers are or what they are offering.
- Decide on one offer, finish negotiations and sign term sheet.
- Conduct 3-4 week due diligence. The buyer gets access to all your data and ensures everything you told them is truthful.
- Sign papers and transfer money, given that everything looked good during the due diligence.
Puh, that is a lot of steps. If you sold your company without an advisor you could skip many of them. The process, however, is designed to get in as many potential bidders as possible and then increase the value as much as possible by utilizing the closed bid part at the end.
What are their incentives then?
When dealing with any business it is important to understand what their incentives are. Incentives influence our behavior and we tend to act according to them. Typically, sell side advisors receive two fees for their work.
1) Retainer Fees
Retainer Fees are paid on a monthly basis to advisors, independently if your business is actually sold. It’s a way for the advisor to be sure you are serious to sell your business. Obviously, you as a seller want to keep these small and keep the large incentive for the seller to the end.
2) Success Fees
Success fees are paid when your business is sold. Only your imagination sets the limits on how to structure them but there are four main ways of doing so:
a) Fixed fee — fixed amount on completion of the sale. Typically used when you already found a buyer and it’s easy to estimate the number of hours the advisor needs to put into the deal.
b) Flat percentage — flat percentage of the value the company is sold for. Aligns the advisor to sell the company for a higher price.
c) Scaled fee — also a percentage based fee but with the advisor receiving a lower percentage of each additional million they sell your business for. Incentives the advisor to reach a higher price but also prioritize speed.
d) Reverse scaled fee — also a percentage based fee but the advisor receives a higher percentage with increased sell price. This structure incentives the advisor to reach the maximum possible price.
How does that impact their behavior?
As promised, let’s explore how these incentives affect the behavior of the advisors. Note, of course most advisors are good people and will do what’s right but incentives still impact our behavior and it’s important to understand how.
1) They get less incentivized to spend time on deal as time passes since their retainer fee is usually paid fully after 12 months and they might understand at this point it will be hard to sell your business. No pay and a hard sell is not the cocktail that ignites hard work.
2a) They are incentivized to spend the minimum possible time on your case independent of the success fee structure. If an advisor can either find time to run 2 deals in parallel or spend more time on yours to get a 20% higher price, where’s the money do you think? Hint: It’s unlikely your business will double in value just because they double their time spent on it.
2b) They are incentivized to get a quick deal since it entails less time spent on the deal and time is money.
3) They are incentivized to accept the highest bid at the end. It is, however, up to you who you want to sell to. Do understand, thought, that an advisor is incentivized to lobby for the highest price and perhaps not the best fit for you.
4) They are incentivized to find large deals and spend their time on those. They way for a sell side advisor to get scale to their business is to pursue larger and larger deals. If they can do 2 deals for $100M each instead of 3 deals for $15M each they choose the former. Also, if they are working on selling your tiny $10M company and your impressive neighbor’s $100M company, all of a sudden it makes a whole lot of sense to give your neighbor a lot of time if they think it could increase the price by 10%.
This was apparently the week of long lists in this newsletter. At some point I will revisit this and explore how to approach this as a seller and buyer. In the meantime, you should be asking yourself how to align your incentives with the business partner you are working with.
Until next time! 👋