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Five Questions to Ask a Business Broker

Robert Knauer
2 min read

Business owners interested in selling their companies often turn to business brokers, investment banks, and other intermediaries for help. These middlemen can provide valuable advice and can guide you through the process, but in return they charge substantial fees. If you are considering enlisting a broker or other intermediary to help you sell your company, here are five important questions to ask them:

What is your fee structure? This typically depends on the size of the company. Brokers typically charge smaller, main street businesses with under $1MM in revenue a commission of about 8-12%. Larger firms sometime charge commissions based on the “Double Lehman” formula — 10% on the first million, 8% on the second, 6% on the third, 4% on the fourth, and 2% on the remainder. This means that a company that sells for $8 million would be charged $360,000 in brokerage fees, a 4.5% commission. There is usually a minimum commission, and some firms charge a retainer.
Who are your references? A professional, experienced business broker should have testimonials and references that you should be able to call.
How many listings do you have? The average business broker will have 15-20 listings at any given time. If the broker is representing too few listings, it could be a sign that they aren't experienced, motivated or capable. Conversely, if the broker represents too many, you run the risk that your sale may not receive the attention it deserves.
What do you know about my business? Brokers often have expertise in certain industries. Those that lack expertise should manifest an interest in learning about your company and your situation so they can negotiate a deal that accommodates your desired financial and non-financial outcomes.
How do we maintain alignment of interests? Sure, both you and your broker will want to sell your company. But you should do your best to determine whether the broker is interested in selling your company at the right price and to the right buyer. The more businesses a broker sells, the more commissions that broker earns — variations in sales price and quality of buyers will have little impact on the livelihood of a broker.

Eagle Peak Capital Partners does not require you to hire a broker to sell your company, allowing you to retain more of the sales price. While you would benefit from using your own accountant and legal counsel, we are able to guide you through the process, enlisting the help of an experienced team of investors and professions. For more information, please send me an e-mail at rknauer@eaglepeakcap.com, and you can also view our guide to the business transaction process here.

How Much Could You Sell Your Company For?

Robert Knauer
3 min read

UPDATE (January 1, 2021): Linked new Pepperdine Private Capital Markets report and updates to the text.

Business owners often wonder how much they would be able to sell their business for. Beyond the simple answer of "whatever a buyer is willing to pay for it," the answer is not easy to come by. For this reason, accounting and advisory firms are able to charge a premium for providing an estimated valuation of a firm. These professional services firms evaluate factors such as a company’s performance, review the strength of the industry, and use detailed financial analytics to produce 100-page reports with a very simple punch line: the company’s fair market value. But a full-blown valuation is not required to get a general sense for how much your company might be worth. Here are a number of key factors that buyers will be examining to determine how much they would be willing to pay:

Cash Flow — In most cases, buyers acquire firms to get access to future cash flows, so this is the starting place for determining a firm’s valuation. Adjusted EBITDA (net income + interest, tax, depreciation, amortization, and other add-backs such as above-market salary and one-time expenses) is most commonly used as a proxy for cash flow, though it is a less accurate reflection in asset-intensive businesses. The data is not typically from just one year or the last 12 months but instead a weighted average of Adjusted EBITDA over a period of time. One can arrive at a ballpark valuation by applying a multiple to Adjusted EBITDA that varies based on the size of the firm and its industry.
Revenue Quality — Quality revenue helps to safeguard continued cash flows well into the future, and the plain truth is that there are certain characteristics of revenue that make it more or less appealing to buyers. Revenue from a large number of subscribers is generally preferable to that coming from a few large projects, which is why software-as-a-service (SaaS) companies can command such high multiples on their earnings. But a SaaS model is not required for high-quality revenue, which can also come from companies that receive a large percentage of their revenue from repeat business. Buyers are often more interested in companies that show slow but steady growth than those experiencing rapid growth because it makes future earnings easier to reliably predict.
Customers — A large number of longstanding customers is ideal. This is an indication that a company is not overly reliant upon a few customers — who might take their business elsewhere or undergo financial hardships that interfere with their ability to continue to be a reliable source of revenue.
Competitive Position — Buyers will be keen to understand the degree to which a company has a competitive advantage, which can come in the form of brands, patents, technology, cost advantages, or other factors that increase the likelihood of that the company will be enduringly profitable
Industry Growth — Industry growth has been shown to have an outsize impact on the growth of companies within a given industry, so buyers will be paying close attention to industry trends and projections.
Track Record — The longer a company has been around, the longer it is likely to stay around, so buyers will place a premium on established businesses. This also provides them with additional data points, such as their performance through past economic downturns.

For a free, no-obligation, and confidential discussion about how these factors apply to your business, please send an e-mail to rknauer@eaglepeakcap.com or fill out the form below — I would be glad to give you a call at a time convenient for you. Thanks.

Who Buys a Company?

Robert Knauer
3 min read

There are a number of different types of buyers out there who might be interested in acquiring your company. These different types of buyers generally have different plans on what they tend to do with your business upon acquisition, the degree of control they intend to exert, and how long they might be involved with your company. Here are the main categories:

PE — Private Equity firms exist to acquire, manage, and sell companies. This industry has really grown in the past few years, to the point where these firms now have around $1 trillion in ‘dry powder’, money from investors that is waiting to be spent on acquisitions. They tend to use large amounts of debt — often well above 50% of purchase price — which further increases their buying power. PE firms make money for their investors by following a three-part process: buy, change, and sell. They buy firms at reasonable valuations, change the companies through restructuring or reorganization to enhance profitability and pay down the debt, and sell the firms at a profit. Most of their investments come in the form of 10-year funds, so the average holding period for a firm is around 4 years. Historically, these firms have done well for their investors, which is why they have all that dry powder.

Fundless Sponsors — These are smaller organizations that lack dedicated capital. These firms have relationships with investors, whom they go back to on a deal-by-deal basis. Some might find it more difficult to make an acquisition because they have to put together a group of investors to make a deal happen, but once they make an acquisition, they have a similar playbook to that employed by PE firms.

Family Offices — A family office is a privately held company that handles investment and wealth management for a high net worth individual, family, or group of families. In the past, most have made their investments through other managers; however, some family offices are now making direct investments in assets such as businesses. While they tend to be more passive than other investors and offer the opportunity of holding on to companies for a longer period of time, there is a large degree of variance among them — no two are the same.

Strategics — Strategic investors are larger companies in a given industry whose leaders are interested in extending their business to a new market, product, or service or to buy out a competitor. They are making their investment to strengthen their strategic position and are often willing to pay a higher price than other buyers. However, it is important to know that there is a high likelihood that the acquired company will change dramatically. Brands are often subsumed and in some cases firms are even fully dismantled in order to clear out the competition.

Holding Companies — Holding companies do not sell any products or services themselves; instead, they exist for the sole purpose of owning other companies. Warren Buffett’s Berkshire Hathaway is an example of such a company. Holding companies usually acquire larger companies, and the acquired companies tend to remain relatively intact.

Employees — An employee-stock ownership plan (ESOP) will gradually transfer the company’s equity into retirement packages for a firm’s employees. ESOPs provide employees with valuable measures of input and control, but they also add administrative hurdles that can slow future development.

Children — Business owners can also sell their company to their children. This occurs more frequently in smaller companies and has the great benefit of keeping the business in the family.

Eagle Peak Capital Partners is different. It is managed by an entrepreneur seeking to acquire and manage one single company, and it is backed by a talented group of experienced operators interested in helping the company reach its full potential. It is a great match for owners seeking to reduce their role or retire, but who are also interested in preserving their legacy and existing company culture. If you are interested in a partnership, please send me an e-mail: rknauer@eaglepeakcap.com. Thanks!