The Intermediary

ENL 4

Step 3, Selecting Your Intermediary

Do you need an intermediary? If so, how do you
go about finding and selecting one?
In my first life, I was a chemical engineer. As
an engineer, I wrote many specifications. And
in each specification, there was a section entitled "The Work."

The Work

The specification for "the work" that you should
expect and require of your intermediary is:

1. Valuation Report. Prepare a report that shows
the value that a typical prospective buyer would
put on the business. The information in the valuation
report is key in making your basic decision to
sell. It is also helpful in deciding upon the
pricing strategy that you pursue in marketing
the business.

2. Enhance the Value of the Business. Survey
the business facilities, operations and financial
reports. Give recommendations to enhance the value
of the business to a prospective buyer.

3. Business Plan. Review the Business Plan and
give suggestions for updating. (It is not a part
of the intermediary's job to prepare the Business
Plan. That is your job.)

4. Marketing Plan for Marketing the Business.
Prepare description and schedule of the marketing
activities for the sale of the business. For example,
categories and sources of potential buyers, recommended
pricing strategy, marketing documentation (Profile
and Descriptive Report).

5. Buyer Search. Do a comprehensive buyer search.
Include the research to compile potential buyer's
lists and access to intermediary's buyer database.

6. Qualify Buyers. Make sure potential buyers
are financially and technically qualified to complete
the transaction.

7. Auction. Conduct an auction, if appropriate,
to get top dollar. Strive to enhance bids by
encouraging bidders to bid their highest and best
price.

8. Chief Negotiator. Act as chief negotiator
for you. Use the power of limited authority to
enhance bid value.

9. Yeoman. Perform all yeoman activities during
the process. Include preparation of marketing
documents, correspondence with buyers and potential
buyers.

10. Due Diligence Process. Aggressively manage
the due diligence process to minimize disruption
of the business.

11. Confidant and Advisor. Act as a confidant
and advisor to you in assessing negotiating strategies,
decisions, alternatives and successful bidder
selection. Be an enthusiastic advocate for your
position.

12. Leader. Lead you and potential buyers through
the process. Expedite and follow through as required
to keep the process on track.

13. Buffer. Act as a buffer between the principals.
Reduce emotional levels as required.

14. Experience. Bring experience to the table
that will recognize and head off deal breaking
conditions before they become fatal.

15. Knowledge Deficit. Offset knowledge deficit
when dealing with sophisticated buyers. All buyers
are sophisticated. Even neophyte buyers soon become
sophisticated because they look at many deals
before any purchase. Sellers usually sell only
one or two businesses in a lifetime.

16. Progress Reporting. Do frequent written
and oral progress reporting to you.

17. Deal Structure. Design deal structures to
minimize taxes and enhance security of any post
closing payments in cooperation with your attorney
and accountant.

18. Transaction Documents. Review Letter of
Intent, Definitive Agreement and other transaction
documents to assure that your full intent is documented.

19. Confidentiality. Do all of the above while
protecting the confidentiality of the activity.

20. Close. Get the deal closed and the seller
funded.

Do you really need an intermediary to help you
sell your business? Even if you feel competent
to perform all twenty of these items of "the work,"
you still need the intermediary to use the power
of limited authority and to do your negotiating
for you.

In his book, "You Can Negotiate Anything," Herb
Cohen's main advice is to "care, but not too much."
What Cohen means is that when you become obsessed
with a negotiation, there is a lessened opportunity
to arrive at a reasonable conclusion. That is
why he always recommends third parties to handle
negotiations. A third party removes one level
of emotion from the negotiation.

Doctors don't operate on themselves or their family
members, dentists don't drill their own teeth,
lawyers don't try their own cases, and you shouldn't
try to sell your business yourself. During this
period, of all periods, your top priority should
be running the business at its top performance
level.

Finding the Intermediary

Successful intermediaries don't advertise in the
Yellow Pages. Most of their clients come from
referrals.

The best source for you is a recommendation from
a successful seller or buyer of a business. Another
source is recommendations from your trusted advisors.
You may run across an active intermediary through
letters you receive from them soliciting businesses
for buyer clients. Keep these letters for future
reference.

The International Association of Business Brokers
is the premier trade association of business intermediaries.
On their website, <www.ibba.org> , you can find
a listing of the intermediaries in your area.
Note that the middle market intermediaries belong
to a sub group of the IBBA called M&A Source.

The IBBA also has a professional designation that
the top intermediaries qualify for based on education
and experience, Certified Business Intermediary
(CBI). CBIs have demonstrated their education
and experience and you might want to use this
a qualifier to help in your selection process.

Selecting the Intermediary

The selecting of a professional is always a difficult
task. It is hard to get quantifiable, objective
evaluations of past activities and to project
those evaluations to future performance. This
is true whether it is a dentist, accountant, lawyer
or merger and acquisition (M&A) intermediary.

The following items will help you in your evaluations
of potential intermediaries. Some items are subjective,
but on those, there are some incisive questions
you may ask to help in sharpening your subjective
evaluations.

1. Chemistry. You will share many sensitive
items with this person. If the chemistry isn't
right, go to the next person. You must have mutual
respect for each other's integrity.

Questions to ask yourself--How do you feel about
the person? Do you seem to hit it off? Is this
someone you feel comfortable to share a confidence
with? Does this person seem to exaggerate? Do
you feel that this person will tell you "like
it is."

2. Experience. Intermediaries come and go frequently.
Most don't last two years. Very few make it to
the five-year mark. If they do, it signifies that
they have learned to provide good, competent service
to their clients. You need an intermediary that
has been through many successful transactions.

Questions to ask--How long has the intermediary
(the person) been in business? What are the areas
of specialty? How many deals concluded? What size?
Are these deals that the intermediary was the
lead person on, or were they deals done by others
in the company? What is the organization's experience
and reputation? Does the intermediary keep up
to date on the industry by belonging to trade
associations?

3. References. Look at their letters of recommendation.
Ask for a list of former clients. Actually call
some of them.

Questions to ask the references--Would you hire
the person again? Are you satisfied with the transaction
as closed? What did you like best about the service
you received? What did you not like?

4. Local. If your business is in San Jose and
the intermediary is based in Chicago, it is likely
that the intermediary will miss some critical
meetings due to distance and time demands. During
the intense part of the marketing effort, the
intermediary may need to be at the site 3 of 4
times per week. All things being equal select
a locally based intermediary.

5. Control of Confidentiality. Confidentiality
is vital in most selling situations. The breach
of confidentiality could cost you a customer or
key employee resulting in a decreased value of
your business.

Questions to ask the intermediary--Will the offering
likely to be placed in a daisy chain list of unrelated
and uncontrolled brokers? Does the intermediary
share information with unrelated intermediaries?
How is the information controlled within the
intermediary's organization? Will you get to approve
all contacts in the marketing process?

6. Number of Projects. Check the workload of
the intermediary. Two to four projects are usually
all any one person can handle.

Questions to ask--What is your current work load?
Do you have the time to take on this project at
this time?

7. Junior Associate. Make sure that the person
to work on the project is the one you contracted
for. Some organizations use their sales organization
to sign you up and then assign the project to
someone else, possibly a junior associate. It's
hard to establish the chemistry you need with
an unknown person going in.

Questions to ask the intermediary--Who will be
working on my project? Who will be at the negotiating
table? Who will be talking to potential buyers?
Who will I call when I have a problem or question?

8. Conflict of Interest. Many situations arise
that portend conflict of interest with your intermediary.
The capital markets departments of banks sometimes
have merger and acquisition specialists--are they
looking out for your interests or are they looking
for bank loans and clients? A similar situation
arises with accounting firms that have merger
and acquisition departments.

Be wary of the intermediary firm that approaches
you as a buyer. Their attitude is, if it's a
good deal we'll buy it, if not we'll help you
sell it. Such an organization will not work to
your benefit, either as a buyer or an intermediary.
If they do buy, they buy because it is a sweet
deal for them. If they try to sell after they
didn't buy, they are trying to sell something
they themselves wouldn't buy.

Questions to ask the intermediary--What business(es)
are you in? What business(es) are your parent
entities in? (Be wary if it is banks, accountants,
investment groups or the like.)

9. Only Business. Your intermediary should be
in the merger and acquisition business only, full-time.
It is a full-time business; one can't be a management
consultant, financial planner, lawyer, accountant
or the like and an M&A specialist too. In addition
to being a possible conflict of interest, such
persons lack up-to-date price information, buyer
access and marketing techniques. The likely result
is that you will only see buyers from the good
ole boy network and will not get a competent evaluation
and comprehensive buyer search.

10. Lawsuits. Lawsuits just seem to follow some
people around. If the intermediary has been involved
in lawsuits before, you may be exposing yourself
to lawsuits in the future, either because of buyer
complaints or your complaints. If the intermediary
is not a good enough negotiator to keep out of
lawsuits, maybe that person is not the negotiator
for you.

Questions to ask the intermediary--Have you ever
been involved in a transaction that resulted in
a lawsuit? If yes, what were the circumstances?
Have you ever been in a lawsuit over your fee?

11. Fee Arrangement. Make sure the fee arrangement
is crystal clear. It's bad news to have a pending
close held up or canceled because of a fee dispute
between the intermediary and principal.

Questions to ask the intermediary--If the sale
price is $XXXXXX, what will the fee be? Will it
be the same if it is an asset sale or a stock
sale? Are there better ways to calculate the
fee to give the intermediary more incentive?

(Most intermediary fees are variable depending
on the sale price. A good way to avoid fee disputes
is to calculate a fee and then convert it to a
lump sum number at the time of the offer acceptance.
That way the fee is settled and contingent only
upon close.)

12. Exclusive Fee Agreement. You will not get
a top notch, experienced intermediary without
an exclusive fee arrangement.

Non-exclusive intermediaries only get paid if
you sell to their buyer. This means these intermediaries
are interested in "selling" their buyer to you,
not finding the best buyer and the best deal for
you. You will waste a lot of your personal time
dealing with unqualified buyers and managing the
competing intermediaries.

A frequent objection to exclusivity is the walk-in
buyer candidate. Is it really fair for an intermediary
to get paid for a buyer the intermediary didn't
uncover? This buyer is no different than any other
potential buyer. The buyer still has to be qualified,
presented with marketing materials, coerced to
make the best bid, and hand-held through the due
diligence and closing process. Getting a winning
bid from this buyer may be dependent upon the
auction process that wouldn't have been effective
without the intermediary's auctioneering.

>From the intermediary's standpoint, identifying
the buyer candidate is a minor part of the process.

The professional intermediary will not work on
projects without an exclusive arrangement. Non-exclusive
arrangements means you are likely to get inexperienced
help.

This qualifier is so important that I would recommend
to you to reject any intermediary that offered
to work for you without an exclusive arrangement.

Follow these 12 items in selecting your intermediary,
and you will have a skilled professional that
will enhance the value of the transaction, save
a vast amount of your personal time and result
in a more likely close at a better price.

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Tip of the Month

A buyer will not consider skim when evaluating

a business. If the buyer offers five times the

cash flow for the business, this means that each

average annual dollar skimmed will reduce the

purchase price five dollars. Skimming a dollar

may save you forty cents in taxes, and cost you

five dollars if you are selling.

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Next Month

Next month we talk about Step 4 in the Exit Strategy

Process, Determining the Market Value.

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Disclaimer

This publication is intended to help the reader understand the issues involved in selling a business. It is designed to provide information reflecting the experience of the editors and writers in helping sellers of businesses. It is prepared and presented with the understanding that the publishers, editors and writers are not engaged in rendering legal, accounting or other professional service. If legal accounting or other expert advice is sought, it should be acquired from competent professionals. The reader would be well advised to seek such professional assistance in the early stages of any consideration of the sale or purchase of a business.

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