How to Interview an Intermediary

by

Joan M. Gruber Ridley, CFP

Selling a business can be very stressful. Chances are you have a large share of your personal identity, and perhaps your family’s identity, wrapped up in it, not to mention the family wealth. Unlocking that wealth through a transfer of a part or all of the business begins when you select a firm to represent you. Gather important information before entrusting anyone with your precious asset.

Where to Meet

Your professional advisor, such as your CPA, attorney, or financial planner, might prefer that the intermediary meet you at the advisor’s office. Instead, consider meeting with your trusted advisor at the intermediary’s office. While there, observe the support staff. Is there full time staff to facilitate information flow about potential or pending transactions? Is the staff polite to callers? Do they appear to be well organized? Read the office shelves. The reading material and shelves will reveal something about the professional’s coursework, area of interest and expertise, and sources of information.

Gather the Fact

Find out how long the intermediary has been doing exactly what they are proposing to do for you. For instance, if they indicate that they have been involved with a certain number of transactions, ask if they were the intermediary in all those transactions or were they an advisor, such as a CPA might be a tax advisor about the deal structure. Structuring deals is one thing but identifying qualified buyers is another matter. Find out if they will post your business (with your company name omitted) on the internet or are they more discreet? The entire process of selling a portion or all of a business requires numerous skill sets. Do not assume that an individual or firm that has the ability or experience to provide a part of the needed services can do everything that needs to be done.

Do They Have the Expertise to Deliver

Although it is not necessary to have tax advisors and attorneys on staff, find out whom the intermediary consults with on a regular basis, or whom they recommend that you retain to advise you regarding certain aspects of the transaction. If they mention the names of advisors with respected firms that are known to have the expertise to advise you regarding your transaction, this will give you an idea of the quality of the intermediary’s work. It might be a good idea to call those whose names they mention to get their opinion about the ability and business practices of the intermediary you are considering.

Have They Been Successful

Find out what percentage of their engagements actually have closed. Industry standard is 25% to 30% for transactions $3 to $10M and 50% for transactions $10 to $50M. A serious seller should not settle for anything near these averages. With the right representation you should experience far greater success. Find out how they arrived at the percentage they quote you. If they are quoting you the track record of the firm’s principals, ask if they will be the lead advisors in your transaction, or will your business be represented by a newcomer to the firm. A newcomer with quality supervision might do an excellent job if your company is small and if no complications are anticipated. Also, ask if that track record was achieved while at the current firm, or were they with another firm at the time. If their success was achieved at another firm, what resources did they have available to them that might not be available at the current firm.

Are They Good Salesmen

Ask how close to the asking price (if they price their transactions) the closing price for previous transactions have been. Also ask what the average number of days or months on average it took to get their offerings from list date to closing. Most firms will have this data available to show you in order to back up their assertions.

Do They Understand Your Business

Ask about the types of businesses they have sold in the past Most will have experience with, or represent that they have experience with, one over the others. When business is slow, some might accept a listing in one of these categories even though they would prefer not to. Be alert to this possibility. Selling a manufacturing plant is quite a bit different than selling a service firm, for instance. However, do not rule out an intermediary who has never sold a business in your particular industry if lack of experience in that industry is the only reason for eliminating them. In fact, some intermediaries claim that specializing in a particular industry can result in loss of perspective if the intermediary has preconceived ideas about your business. This type of prejudice might cloud their judgment and ability to be objective.

Do They Have Marketing Expertise

Ask to see a whitewashed copy of the firm’s offering memorandum for a business that resulted in a closing. Study it and ask detailed questions about the transaction. Their answers should be an indication if this document is an idealized version of a transaction or the model of a transaction that they aspire to be involved with, rather than an actual memorandum that was used. This is where some intermediaries will shine while others will fade. Intermediaries who have not actively marketed a number of businesses often are not particularly skilled at correctly valuing businesses or putting together the offering memorandum or book. It takes a bit of salesmanship to present a business in the best possible light, as well as identifying the short-comings of the enterprise. It requires more than putting together pages of numbers, especially historical numbers. Look at the memorandum as a prospective buyer would. Buyers purchase businesses because of their perceived future value,but the price they are willing to pay is based on historical performance of the business.

What Valuation Method Will They Use

Query the intermediary about how they arrive at an offering price. Is their method based solely on a multiple of cash flow, or ebitda, or do they have a keen understanding of the requirements of the current market and other intangibles that affect value? Ask about the typical deal structure for a business such as yours. How much does the intermediary know about how a serious buyer will finance the purchase. Is the intermediary being honest with you about the potential need for seller financing? Most sellers want all cash at closing, but an experienced, honest intermediary will tell you upfront if some seller financing is a real possibility or a necessity.

Do They Understand the Marketplace

After the intermediary has had an opportunity to learn something about your business, ask them to describe your potential buyer. Find out how the intermediary will go about identifying and contacting potential buyers.

Can They Assemble a Good Team

Ask what role, if any, your current advisors will play, such as your CPA, attorney, and financial planner. If your CPA or attorney does not have considerable experience as in advisor to transactions, an experienced intermediary will probably insist on putting together the right team, with some involvement of your current trusted advisors.

Another aspect of this process is learning about the intermediary's compensation. The larger the transaction, the more likely it is that they will require a retainer that might or might not be credited against a success fee. A retainer fee is often justified if: the intermediary has a stellar track record; the value of your business is large enough; the probable deal structure is complicated enough; and if the intermediary is likely to invest considerable time and expertise before the marketing of the business is begun. If that is the case, then the intermediary will often require a retainer to be certain that you are a serious seller before they invest their time in preparing to market your business.

There is quite a bit of information to be gathered before making a decision about an intermediary. For that reason, it is important to be organized and ready to ask questions. It's worth the time to investigate your options and ask the right questions, because you have so much riding on your decision.

 

Joan M. Ridley is president of Business Wealth Solutions, a Dallas-based advisory firm that consults with business owners about how to successfully grow and leave their business. Visit our website at www.bwsllc.net. Call us today at 214.692.9192 for a complimentary meeting to learn how we can help you get where you want to go.

Copyright 2004 Joan M. Ridley