In a recent article, CPA Practice Advisor argues that the reasons why businesses don’t sell are varied and include changes in market conditions and businesses lacking proper documentation. However, like with other articles talking about success rates in the industry, they fail to mention that success rates vary widely and that some business brokers (or “intermediaries” to use a more inclusive term) have success rates of 100% while others sell fewer than 10% of the businesses they take on. Why this disparity across the industry?
CPA Practice Advisor claims that the most frequent reason for a business failing to sell is the gap between the owners’ price aspirations and what buyers are willing to pay.
“One of the primary issues facing the sale of businesses is the valuation gap. A valuation gap is the difference between the owners perceived value and the actual market value.”
So why, then, do some intermediaries manage to sell 100% of the businesses they take on? Why don’t they experience the “valuation gap” that frustrates other intermediaries when it comes to finding buyers and completing on deals?
The answer, we believe, lies largely in the terminology. The term business brokers is used to cover a wide range of operators – from one man bands …to Deloitte and PwC i.e. top accountancy, corporate finance firms and M&A boutiques; from complete amateurs with no experience to seasoned, qualified and experienced professionals; from highly disreputable firms (covered extensively in the media) to some of the world’s top investment banks.
But more importantly, the difference in success rates is down to how firms operate at different ends of the market. To understand this we need to look at two extreme examples. Let’s call the intermediaries WeSellAnything Business Transfer Agents Ltd and Acme Corporate Finance LLP.
The former would:
- Typically take on businesses at the lower end of the market – corner stores, launderettes, fish ‘n chip shops, other “Main Street” businesses. There is less demand for these businesses as they often suffer from serious flaws (such as being reliant on the owner/s and lacking a full management team);
- Typically take on businesses even when the owner/s have unrealistic price aspirations. The owner’s initial price aspirations are not important as the intermediary knows the owner will eventually drop his price if he finds no takers. If the owner chooses to eventually take his business off the market there is no great loss to the intermediary as he’s probably already taken a small fee to cover the initial work/marketing;
- Invest minimal effort to sell the business. They do little beyond creating a “sales brochure” and listing the business on the business-for-sale marketplaces. There isn’t enough “meat” in the deal for a competent person to devote a lot of time to hunting down the right buyers and creating conversations with them. It’s a “bung it online and sit back and wait” model;
- Typically take on even those businesses that have a near zero chance of sale. The intermediary isn’t too concerned about the chances of sale – he gets compensated for his initial effort by way of an advance fee. (In some cases there is no advance fee, but the broker derives other advantages from taking on the no-hopers. Such clients help him pad out his website and give the impression that the brokerage is large and very popular.)
These brokers can see “success rates” of under five per cent!
On the other hand, the latter company would:
- Typically take on businesses in the lower mid market (a few million pounds in turnover) and above i.e. “Wall Street” businesses rather than “Main Street” businesses. In all likelihood they have a threshold and would turn down a business generating less than £1m in profit (or EBITDA). The intermediary knows that these clients are more likely to appeal to buyers as investors need to see enough “meat” in the deal to justify spending money on accountants and lawyers to check the business over before investing in it (which can often cost in the tens of thousands of pounds …or more).
- Turn down businesses where the owners have unrealistic price aspirations… or they may offer to work in a (paid) advisory position first to develop the business to the point where its market value reflects what the owners hope to get for it. When these intermediaries do take a business to market, it’s more likely to sell because it has been realistically valued;
- Spend time with the business to prepare it for market. This may involve fixing “flaws” that are likely to scupper deals, or getting together the right documentation that they know will be required by the buyer’s due diligence team. They do charge much higher fees for all this work – the kind of fees that smaller businesses just can’t afford (starting in the tens of thousands of pounds);
- Put in a lot of professional effort to draw up a proper information memorandum or pitchbook which is often 50 pages or more and includes detailed analysis of the financials, the operation, the competition, the industry’s prospects etc.
These brokers can see success rates of 100%.
But that’s because they take on a relatively very small number of businesses, are a lot more selective (and take on only those businesses that are more likely to sell), charge high fees and provide the kind of exit preparation assistance that improves chances of sale …and they work with only those business owners who have realistic price expectations. Their model is geared towards high success rates.
In summary, any stats that look at “success rates” for the industry as a whole are deeply flawed. It’s not that “business brokers” fail to sell 90% of business. It’s the case that most business brokers at the “Main Street” end of the market have a 95% or higher failure rate, and they skew the stats badly because they account for the bulk of the businesses coming up for sale each year.