The Firm That Sold Your Friend's Company May Be Wrong for Yours

The single biggest predictor of whether your company gets a real process or a listing is the size of transaction the firm actually works. Almost no owner asks.

Three broad classes of advisor exist, and they differ on four things: the size of transaction they work, how they work it, the kind of buyer they reach, and how they charge. Each class contains good firms and bad ones. The question is not which class is best. It is which one is built for the deal you have.

Business brokers

Generally transactions under five million dollars of value, and the method resembles residential real estate: carry a large inventory of listings, advertise them, cooperate with other brokerages, and wait for a buyer to raise a hand.

The companies are usually local and so are the buyers. Restaurants, dry cleaners, lawn services, convenience stores, auto shops. The buyer is frequently an individual purchasing a job rather than an asset, with limited cash, who needs the seller to finance part of the price.

Compensation is a percentage of the sale paid at closing, with nothing up front. That matters more than it looks, because it means nobody is being paid for the preparation, so very little preparation happens.

M&A firms and investment banks

Roughly five million dollars up to a few hundred million, and the method is the opposite of a listing.

Heavy preparation before anything reaches the market, then a researched, deliberate campaign aimed at buyers chosen because your company solves a specific problem for them. The front end produces a document that explains the business properly.

The buyers are operating companies, private equity funds, family offices, and individuals with real capital. They have money or committed financing, and they have bought things before. Compensation is an up-front fee plus a success fee at closing, and the up-front fee is what pays for the preparation.

Large transaction firms

Above that range, and the method shifts again toward structure and financing.

The universe of buyers for a very large company is small enough that finding them is not the hard part. The hard part is engineering a transaction the buyer’s own capital structure can carry.

What hiring from the wrong segment looks like

Illustrative. An owner ran a precision-optics company worth somewhere around eleven million dollars, and she hired the broker who had sold her friend’s landscaping business. The firm was good at what it did. It listed the business, advertised it, and produced a steady stream of individual buyers, none of whom could have financed a quarter of the price.

Nine months later she had still not met anybody who could close, and the handful of companies that could have paid her number had never heard the business was available, because nobody had ever called them.

Nothing went wrong in that story. The firm did exactly what its model does. The model was built for a different company.

The tell is the method, not the brochure

Every firm will describe itself as full service, so ask what it actually does in the first ninety days.

A listing model markets availability. The document is short, the campaign is advertising, and the work begins when a buyer responds.

A process model markets a case. The first ninety days produce a recast, a researched view of value, a document that explains the business, and a list of named companies with a stated reason each one should want this. Nothing goes out until that exists, and what goes out first identifies nobody.

Those two produce different buyers, and the buyers are the whole outcome.

Fees move with the segment, and so does what they buy

Nothing up front sounds like the cheaper arrangement and sometimes is the more expensive one, because the preparation that raises the price is the work nobody is funding.

An up-front fee buys the recast, the research, and the document. Those are the things that decide whether a buyer’s accountants confirm your earnings or rebuild them, and whether the companies with a reason to pay a premium ever learn you exist.

What getting the segment wrong costs

Eleven months, and the market.

The owner above did not pay a bad fee. She spent nearly a year showing his company to people who could not buy it, while the parties who could were never contacted, and she came out of it with a business that had been quietly available for eleven months and no offer to show for it.

The cost is not the fee and it is not even the year. It is that the buyers who mattered formed no view of the company at all, and the ones who did form a view were the wrong buyers.

More on this: Your CPA, Your Attorney, and the Person Who Actually Sells Your Business; The One Question That Tells You Whether to Hire Them.

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This is what we do. Prism Edge runs a process rather than a listing: the recast and the research first, then a campaign aimed at named companies with a stated reason each one should want this, then the parties run in parallel. It is the model built for companies above the listing market, and if your company sits below it we will tell you that instead of taking the engagement.

The full chapter on telling a good advisor from a bad one is in The Business Sale, free to download here.