Business Owners Beware Of The

We were just concluding our first information gathering meeting with a new client who had engaged us to sell her business when she handed us a letter. That letter was from another Merger and Acquisition Advisory or Business Broker firm.

The letter began: "Our buyer group has requested that our firm assist them in locating a company within your industry that would be willing to sell their business. The limited information we have regarding your firm indicates that your business may meet the buyer's requirements. We would like to speak with you further about the opportunity to sell your business."

Our new client asked us what we thought about this letter given that her company was very unique and she did not believe that this company really understood what her business did.  As I read the letter, my suspicions were confirmed. This unfortunate practice of soliciting business owners through mass mailing representing supposed buyers gives our profession a real black eye. I don't know where this practice started, but many in the business broker profession have unfortunately been taught that this is a valid way to prospect for sell side engagements.

Here is how it works. If the business owner responds to the solicitation, the business broker schedules an appointment to meet with the business owner. When the broker shows up, one or two things happen. If he says he is representing an industry buyer, somehow the potential selling company just is not a fit. It is either too small, not growing fast enough, in a slightly different niche, doesn't have big enough gross profit margin, etc., etc.

Another approach is to say that he is representing a Private Equity Buyer. Let me tell you, everyone in our profession could claim that. Our firm gets 5 solicitations per week from Private Equity Buyers. The typical email reads:  ……………..should you have any clients or prospects who fit this criteria and our investment parameters below, we certainly would be interested in discussing them with you:

–    New investments: $20+ million in revenue, $3+ million in EBITDA

–    Add-on acquisitions: $3+ million in revenue
–    Investment size: $8 - $50 million
–    Geography: U.S. and Canada
–    Industry generalist

With that broad criteria and the industry agnostic approach, thousands of businesses could qualify. There are a couple of problems here. First, Private Equity Firms almost never engage an M&A firm on a retainer and success fee basis. In other words, if the M&A firm will go out and find prospects on their own dime and bring those prospects to the PEG, and a deal is closed, then the PEG will pay the M&A firm a success fee. It is entirely a contingency based model. So for an M&A firm or business broker to call one of these PEGs a buyer client is a bit of a stretch. Also, PEG's are strictly financial buyers, so if you want more for your company than 5 X EBITDA you are not going to get it from these buyers.

Let's get back to our client's letter. As I read further, it continued, "The Acme Business Group has over 80 years of combined experience in business brokerage and is an affiliate of America's largest network of business brokers. As a result, we can give your business confidential exposure to these qualified buyers locally and nationwide. We can help prepare your business for sale with the proper documentation and an effective presentation that will position your company most advantageously to receive the highest offer from one of our potential buyers. We are here to assist through the entire selling process from preparation to negotiation to closing documentation."

Gee, it sounds like their original "qualified buyer" has fallen through before the end of the letter and they now want to represent you to all of the other buyers out there that are right at their fingertips or at the fingertips of their large, nationwide affiliate network. Get real!

As a business owner, you probably get one or two of these letters per month. Hopefully you will see through them and put them in their proper place, the waste basket. Unfortunately for the Merger and Acquisition advisors that really do have a retainer fee based legitimate buy side engagement, we have an extra hurdle to clear in order to do our job. The approach that our firm uses to overcome a very skeptical business owner community is to provide a very specific description of the target company in our buy side engagement agreement.

For example, our agreement might read, " The purpose of this agreement is to set forth the terms and conditions under which MidMarket Capital, Inc. ("MMC") agrees to advise Acme Machine Tool and/or its owners, shareholders and affiliates (collectively, "Clients") as consultant, and the sole and exclusive finder, in an effort to locate acquisition targets, described as machine tool manufacturers for the medical device industry with revenues between $20 million and $100 million, and effect the purchase or merger of the identified acquisition target's business."

If we get interest, but a healthy dose of skepticism from the target company owner we are contacting, we often send him our buy side engagement agreement with the identity and specific contractual terms blacked out. We leave enough of the signature visible so that they can see that it is a real contract, but cannot determine the identity of the client. This generally works to at least begin a dialogue and move to the next step.

Selling a business is not easy and your choice of the firm that you use to represent you can be the difference between a successful outcome and a big waste of time surrounded by a lot of frustration. My hope is that a lot of business owners read this article and reject this unfortunate business process.  As I tell our associates, "What a client sees before the sale is what they can expect after the sale."  The sale here is selling the business owner on engaging the Merger and Acquisition Advisory firm.  Do you really think a firm that approaches clients with this lack of integrity deserves to get your business?