Matt Gilbert
March 28, 2023
Where should you turn when you want to take on a growth partner or maybe even sell your business altogether?
Taking on a growth partner typically involves a business owner selling some equity – usually a controlling share of 51% or more, but not always. Doing so can be a pro-level move as it will help the owner diversify wealth while simultaneously injecting new energy, ideas, perspective, connections, and cash to fund a new wave of growth in the business.
On the other hand, selling a privately-held company typically involves a complete transfer of ownership to a person or entity that acquires either all the stock or all the assets of the business. Even when an owner sells the business, they will usually remain involved for a transition and training period typically lasting between 6 months and 3 years.
When contemplating either of these options, an owner is entering a world of specialty finance and complex negotiations where few people truly understand and appreciate how things work. This article will help you know where you fit in the space and provide guidance on where to begin your journey as you start thinking about a meaningful transition.
If your business is in the lower middle market (generally defined as $5 - $50 million in revenue), there’s a secret in our industry that nobody wants you to know. That secret is there’s a well-documented national success rate of only approximately 20%. What does that mean? It means that roughly 4 out of every 5 businesses that attempt to sell or attract a growth partner fail to achieve their objective. Why is the failure rate so high? The number one reason is: Alignment with the wrong advisors or wrong processes.
This statistic breaks my heart because it doesn’t have to be this way. I’ll help you understand which types of advisors deliver what kinds of results, so you can decide where to place your trust and properly align yourself for success.
In today’s cut-throat M&A environment, professional buyers have learned that they can on average buy businesses 35% below fair market value (FMV) if the seller doesn’t have a professional transaction advisor. This is why business owners get so many flattering emails, letters, phone calls, and visits from Private Equity firms, professional buyers, vendors, and strategic competitors. These folks are savvy buyers, and their direct outreach efforts produce below-market-priced acquisitions all the time. Many business owners respond to these tactics confidently thinking they can engage their attorney and accountant to help them negotiate and close a sale or growth equity injection without incurring the expense of working through a professional transaction advisor. The truth is they absolutely can do this; it happens all the time. The sad part is that this route has been proven over and over to produce transactions which leave about 35% on the table on average. In our firm’s experience, we have seen figures as high as an 85% discount off FMV.
Lesson: Transaction advisors make a good living, and the best of them will pay for their fee many times over in added value they capture for you. Don’t go to battle without a good one in your corner!
Point: Never let an attorney be your negotiator and never self-negotiate. You’ll feel like you did a great job until you later find out you were beaten badly by a professional team on the other side.
There are do-it-yourself websites (like MLS for real estate) and internet-based business brokers who deal in low-touch, high-volume transactions. These are great places to list or find side hustles, small franchises, donut shops, nail salons, car washes, and the like. Valuing and acquiring these businesses is simple and common. They trade almost like commodities. If you have a business like this, these sites are your best value, and they get the traffic that’ll eventually lead to your sale. Just think of them like a do-it-yourself project.
The next step up the complexity ladder is the broker group serving small local businesses. Think retail in strip malls, franchises, 1- to 3-location simple businesses like apparel, auto repair, restaurants, medical practices, lawn care, etc. These firms are truly brokers, and they do a good job helping local business owners enjoying revenue between $1 - $5 million find their successors. Transactions in this space are aided by a secret weapon offered through the Small Business Administration (SBA) which helps companies like these change hands through providing a powerful incentive to lenders who support the transaction. Most sellers of these businesses work “in” the business (rather than having a separate management team), and most buyers are actually buying the seller’s “job,” envisioning they will assume that role. This is a great place for many would-be entrepreneurs to start. Franchised / Main Street Business Brokers do a great job creating an efficient marketplace for these transactions.
The descriptions I’ve used so far for the M&A space are fairly well-defined, and a business owner can easily understand the niche in which they should fit. But now the waters get a little murky. When a privately-held business has revenue between $10 - $100 million, it is best served by Intermediaries and Middle Market Transaction Advisors.
Hold on! The previous group topped out at $5 million in revenue, and this one starts at $10 million. Does that mean a $5 - $10 million revenue business is in “the M&A no man’s land”? In a word, yes. Healthy, successful businesses enjoying revenue between $5 - $10 million are generally too large for an individual to buy and too small to move the needle for professional buyers/investors. These business owners need special attention from an advisor when looking to sell. Their solution? We have seen that most advisors who claim to be in the Intermediary / Middle Market Transaction Advisory space are firms who are only slightly more sophisticated than Franchised / Main Street Brokers. They are deft at marketing to and good at building relationships with middle market business owners ($10 - $100 million revenue), but their methods, processes, tactics, and personnel skill sets have them geared to serve companies in that no man’s land size. It is my firm’s experience that the vast majority of transaction advisors perceived to be our peers fit this definition. Therefore, the $5 - $10 million business owner should seek out those advisors.
The real Intermediaries and Middle Market Advisors are those with the systems, processes, and personnel to successfully close transactions for companies with revenue of $10 - $100 million as a routine aspect of their core business. If an Intermediary or Transaction Advisor is great in the SBA lending space, that’s a strong sign that they focus on the small end of the market. Conversely, if they routinely close $100 million transactions and your sale is expected to be $25 million, that is also problematic. Proper vetting and alignment in this space is crucial to achieving your goals. Unfortunately, many advisory firms don’t have the discipline to tell you when the fit is off. Most will convince themselves and you that they can achieve your objectives when statistically we know they can’t.
By way of example, our practice’s sweet spot for a sell-side client is revenue of $15 - $80 million. Have we successfully navigated smaller/larger deals? Absolutely! However, our tools, processes, systems, and personnel are maximized when working on transactions within our sweet spot size. This is where we deliver the best value and where few others can compete with us. To prove it, we have amassed a 94% success rate when we engage to sell or find a growth partner for businesses in this range. Compare that to an industry-wide failure rate of 80%, and you can begin to see why proper alignment with a disciplined transaction advisor is so important.
Cautionary Plea: Don’t get fooled into thinking you have a great middle market advisor when their processes and personnel are best suited for no-man’s land size (or smaller) transaction support. It is an all-too-common mistake business owners make and the number one reason 4 out of 5 transactions never achieve their objectives.
Note: The term “Investment Banking” is often used in the M&A vernacular, and it is categorically correct to describe what my firm does. However, the term is typically reserved for firms handling very large transactions. If your business’s revenue is over $100 million, it is possible that an “Investment Banker” will be the best match. Certainly, as you approach $500 million and above, names like Goldman Sachs, Morgan Stanley, and UBS should come to mind.
In conclusion, please remember that 4 out of 5 lower middle and middle market transactions fail because the business owner has not aligned with an advisor best suited for them. It is quite common for business brokers and some who bill themselves as “middle market advisors” to chase opportunities that will stretch their capabilities and then fail to achieve their clients’ objectives because they get in over their heads with complexities of the engagements.
If you’re a business owner, I hope this article has helped you determine where you fall and where to turn for professional transaction assistance. As with all industries, there are really good and incredibly lousy firms in each of the segments described. If you want to skip the process of determining who is a high achiever and who isn’t, feel free to contact us, and we can point you towards great professionals in each of these segments in every region of the US. Knowing you only get one shot at obtaining a life-changing result, we are happy to provide guidance and expertise as you begin your journey.
If any of this resonates with you, we encourage you to take our M&A Discovery Questionnaire and talk with us to see if your business makes the cut as one who can still command a great exit in this M&A environment. We will be in touch quickly to discuss the results. Click here to take the assessment.
Gilbert & Pardue Transaction Advisors (GaP) is a Houston-based business advisory firm serving lower middle market and middle market business owners from coast to coast through representation for Mergers & Acquisitions (M&A).
Matt Gilbert and Bret Pardue established GaP to provide owners of lower middle market and middle market businesses – those businesses generally enjoying annual revenue of $10-$80 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle markets provides the quality of representation and transactional expertise that we do.
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