This is the story of Sidney Weinberg, President of Goldman Sachs from 1930 until his death in 1969.
From his first job as cleaning the hats and shoes of the partners at the bank, he went on to oversee some of the biggest deals of the 20th century - including the IPO of the Ford Motor Company in 1956.
By applying the same rules (and no little charisma) as any banker would, a janitor’s assistant famously became known as ‘Mr. Wall Street’. Sidney Weinberg isn’t the only one who’s ever made an unlikely jump into investment banking.
Small business owners do it all the time.
And if you’re the owner of an SME and considering a sale in the near future, there’s no reason you can’t sell your business without a banker. It’s not rocket science but it is a discipline.Like any discipline, by applying some key rules, you maximize your chances of success when the time comes to selling your business.
Why and When to Use an Investment Bank
Before deciding to sell a business without an investment bank, it’s useful to understand the role that the banker plays when representing a seller in a transaction.
The banker’s primary functions include:
- setting a valuation for your business
- putting together a sales memorandum which outlines why someone should buy your business.
Once this is done, they leverage their industry contacts to find suitable buyers, then represent you in negotiations and closing.
So, bankers do add value. The question is, do they add value for your business?
The advantage that many business owners hold over even the most experienced bankers is a deep knowledge of their own business and the industry that it operates in. This generates huge value in itself. And if you do hire a banker, they’ll still need to spend time with you to better understand the dynamics of your business which only you can know.
Essentially, the decision to hire a banker comes down to how much time you’re willing to dedicate to the process and how well much of a handle you feel you have on the process.
Ask yourself some questions like:
- how comfortable am I putting together the documents?
- am I likely to find a buyer locally or will I need to look further afield?
- what is my business worth, realistically?
Your answers will ultimately tell you whether you need to hire a banker or not.
1. Valuing your Business
Valuing your business might be the place where bankers add the most value for sellers. This isn’t because the task is difficult; it’s more because it’s so difficult to be objective.
When it comes to selling, it’s remarkable how many owners believe that their business is set for astronomical growth in the coming decade.
In most cases, they’re not being dishonest; they’re just falling into the trap of not being objective in their projections.
Remember that your business is one of many and this has to be factored into the valuation.Unless you have an exclusive long-term contract that guarantees income, intellectual property or something else that truly differentiates it, a competitor could come from nowhere and eat your lunch, destroying the value that you’ve created as its owner.
Placing too high a value on a business will also mean you scare away potential buyers aiming at a more realistic valuation.
2. Internal Due Diligence
If the buyer wanted to conduct due diligence on your business tomorrow, how would it stand up to inspection?
When conducting internal due diligence, take on the mindset of a buyer and ask yourself the questions they might ask.
The goal here is to be as transparent as possible rather than understate the unattractive elements of your business or hide them away altogether.Doing that not only exposes you to getting caught, but may even lead to legal action post closing.
Having conducted internal due diligence, you may even find that your business is not quite ready for a sale.
Perhaps you’ve experienced a drop in sales caused by losing an important client or you’re about to go through a potentially costly legal process.
As a rule, buyers prefer to see numbers going in the right direction, even if the underlying reasons for a short-term downward trend can be easily explained away.
Internal due diligence will help you address this.
3. Document Preparation
Bankers unquestionably generate value for business owners in the preparation of sales memorandums for businesses.
However, excellent samples are freely available online and downloading a few will allow you to familiarize yourself with the standard industry format for these documents, and the level of detail that goes into them.
Note how the voice of these memorandums is in the third person (‘the business’) rather than the first (‘we’re…’).The information memorandum is the most complex, but just the beginning.
At a minimum, you’ll also need:
- 3 years of financial statements (preferably audited)
- accompanying tax returns,
- a statement of seller’s discretionary earnings and cash flows,
- a detailed inventory list
- a list of fixtures, furnishings and equipment with value detail
Don’t worry if this all seems daunting. These documents are the bread and butter of most accountants and shouldn’t take long for your accountant to put together.
4. Sourcing: Identifying Potential Acquirers
As soon as all these documents have been compiled, it’s time to look for an acquirer for your business.
You can make this a more time effective process by sitting down beforehand and outlining why someone would buy the business (what they would obtain by assuming control). Would they be acquiring cash flows, an asset or a process?
Understanding the answer to this question will allow you to filter through potential acquirers.
As well as an extensive network of contacts that could be suitable acquirers, a good banker will intuitively know who will be interested in your business. Their contact list will also be extensive.
Understandably, they play on this aspect when selling their services to business owners. It’s not uncommon for bankers to claim they have access to a network of tens of thousands of potential buyers.
The fact is that everyone has access to this network - it’s called the internet.5. Negotiations and Closing
The negotiations stage will typically involve a buyer providing a lower offer than you’ve requested (this is the nature of the process and not to be taken as a slight on the business) and some financing that is usually a combination of a sum paid upfront followed by installment payments, payments based on the business performance post-closing and perhaps even some equity in the buyer’s own business.
It’s good practice to bring in an accountant here to advise.Having carried out your own internal due diligence, the buyer’s due diligence phase - post acceptance of their offer - should run more efficiently.
If the buyer has offered future payments as part of their offer, it’s good practice to conduct some due diligence on them to ensure that they’ll be capable of fulfilling their end of the deal.
You may need to call in an accountant for some assistance here but having come all this way, you’ll be a lot more comfortable and acquainted with the process of selling your business without a banker.
Conclusion
Bankers provide a valuable function in their role as advisors and intermediaries in M&A, but that doesn’t make them irreplaceable.
Every year, thousands of businesses are sold by their owners without investment banks.
If you make the decision to sell your business without a banker, there’s every reason to believe you can bring just as much, if not more, value to the table. Following the guidelines we’ve laid out above can help you along in achieving that goal.