Pinnacle Brokerage Group* was a successful middle market employee benefits brokerage firm. Founder Josh Smith was 58, and like many owners at this stage, he was considering selling the firm so he could realize some of the proceeds from what he had built, gain access to the capital of a larger company to invest in growing the business further, and position the firm successfully for his planned retirement in the next five years.
Josh had been having conversations on and off with several buyers who were pursuing him to sell his firm and join theirs. Like many owners in his position, he took various calls and meetings. Eventually, he had a meeting with a suitor whom he found truly impressive, and for good reason: They are a fast growing, professional, high-quality brokerage firm.
After a series of engaging meetings, Josh agreed to provide financial information to this one suitor. After performing their financial analysis, they put forth an offer to buy Pinnacle.
By engaging with one buyer exclusively, Josh was making mistakes common to many owners in his situation. Luckily, with a partner to challenge him, he realized before signing that he needed to reset the process, take control, and ensure the best outcome. Here’s how he did it.
Relationships vs Process
Josh was very much like most owners of small- to mid-sized insurance, financial services, and HR businesses: They are relationship oriented, having built their businesses on exceptional relationships and trust. It is easy for owners to see M&A as fitting in this box, especially when they are being recruited by firms with deep pockets and a great story to tell.
Buy-side firms get this. I understand this dynamic well; I worked for a buyer for 17 years and did alI I could to be the exclusive bidder on deals. Buyers are in the recruiting business. They reach out to owners to establish a relationship in anticipation of when the owner is ready to sell. They do this to improve the chances that they will be an exclusive bidder. And, about 50% of the time, this works.
Sellers Don’t Know What They Don’t Know
Shortly after receiving the offer, Josh and his minority partner Susan attended one of my presentations on being a 5-Star M&A Planner. They realized that, while relationships are important, having a proven, structured process is just as important when making a decision as big as selling your business. Some key aspects of what they learned were:
- They only had one offer, and therefore they had no negotiating leverage.
- The buyer was in a slightly different market than Pinnacle in terms of client focus. They weren’t confident that they could count on this new market focus to play out successfully.
- While they had met the M&A team of the buyer and a few key executives, they had no interactions with the back office team or other owners who had joined the firm.
As Josh said to me when we spoke after the presentation, “I realized I didn’t know what I didn’t know” about the strength of the offer he had in hand and the market for his business. Sellers rarely do know unless they have an advisor and undertake a methodical and expansive M&A process.
Buyers have experience purchasing hundreds of firms; owners typically sell only once. As a result, owners don’t see the whole market, don’t know the right questions to ask, and don’t negotiate effectively. That’s why when owners deal directly with a buyer, the valuation tends to be around 20% lower and the terms are not as favorable.
To be clear, the buyer wasn’t offering Josh a “bad” deal. The price was fair. What a lot of owners don’t appreciate when they are approached by buyers is they are dealing with salespeople who are paid to do what’s in their employer’s best interests. Here are two examples:
First, reputable buyers are going to make an owner a “fair” offer for their business. Obviously, they are not going to recommend to them to solicit other offers to compare it or let the owner know if there is room for negotiation. What they will say is something like, “we know what other firms pay, and we are competitive.” Without multiple bidders, this is impossible to verify.
Second, buyers keep a tight camera on their operational strengths and minimize challenges they may be having. Buyer’s representatives may even downplay these issues to themselves—it’s human nature when trying to accomplish a goal like closing a deal. Moreover, some of the M&A teams in the industry get commissions when deals close.
The Benefits of a Proven, Structured M&A Process
This is what Josh realized after he had hit the reset button and retained Rosen Advisory to guide him through the M&A process.
Based on our knowledge of the M&A market, we identified at least 20 buyers who would potentially be interested in purchasing Pinnacle. We sat down and talked to Josh and Susan in depth about their goals—financial, personal, and professional. This enabled us to narrow the list down to three buyers that could be a strong potential fit and provide points of comparison to the current firm and offer on the table.
We worked with Pinnacle to vet and rank the potential buyers and facilitated online and in-person meetings. Relationship building is still crucial to the process, but rather than reacting to a single offer, now Josh was in control of the process and could focus on buyers whom we had already vetted for financial, operational, and cultural fit.
Next, we asked all three buyers to make offers, carefully analyzed each, and chose the best one.
As a result, Josh ended up selling to a buyer who had several advantages for Pinnacle:
- A higher upfront price and earnout.
- More flexible compensation programs for producers.
- New tools and resources applicable to a wide range of his clients and prospects.
- Alignment with dozens of other firms in their market segment that had sold to this buyer.
Did it take more time and effort and delay the sale by a few months? Yes, but going through a proven, structured M&A process was more than worth it in the end.
Every business owner gets direct calls from buyers, and how you handle these incoming calls and engage with potential suitors will have massive financial and personal impact on you when you close a deal. This case study represents a dynamic I have seen play out countless times in my M&A practice, and I’d welcome the opportunity to have a conversation about the ideal process for you and your firm. – Brett Rosen
*Note: For privacy, the names of the company and owners have been changed.
Key M&A Takeaways for Business Owners
Proactive Market Engagement: Canvass the market of potential buyers and solicit multiple bids rather than settling for a single offer. You need context and leverage.
Value of Expert Guidance: Work with an experienced advisor who knows the players and who can help navigate the complexities of selling a business, including intangibles such as operational and cultural fit with buyers.
Importance of Process: Relationships matter, but a structured M&A approach that puts the seller in control ensures the best outcomes.