There is a well-organized system for selling businesses. Smaller businesses, generally with revenues under $10,000,000, that are primarily owned and operated by individuals, are sold by business brokers. Much larger businesses, such as ones with revenues of $1 Billion or more, are marketed by Investment Bankers to a select group of potential organizational buyers. These are other companies in the industry or a related industry, Private Equity Groups, Family Offices, and other business organizations. Businesses with about $15,000,000 to $200,000,000 in revenues are sold by M & A intermediaries. Since the potential buyers for these businesses are primarily other businesses, these M & A intermediaries use the same process – identifying and pursuing business organizations that are potential buyers — as Investment Bankers to market the businesses.
Because business brokers are marketing to individual buyers, a good business broker uses a variety of marketing methods to reach them. We market businesses on our website using SEO and Adwords, we use Constant Contact to reach our buyer database of almost 3,000 buyers, we market on the leading Internet business-for-sale websites, and we market through BBANE, a regional co-broke group I created with other business brokers in 2008. These reach many potential individual buyers and some industry buyers. But, they only reach a few of the potential organizational buyers – only the ones actively searching on the Internet for a business to buy.
The businesses that fall between the cracks of this system are smaller businesses whose best buyers are other businesses rather than individuals. These are businesses that are not the ones that individual buyers are primarily interested in. They require specific experience or education, such as a specialized college degree or vocational training, that most individual buyers do not have. So how are the industry buyers for these businesses reached? By the same method as the Investment Banker or M & A Advisor uses. The intermediary puts together a list of potential buyers and reaches out to them directly. But, this is a very time-consuming process. Although the Investment Banker and M & A Advisor earn large success fees (commissions) upon the sale, they also receive upfront fees for doing this project. The primary reasons for the fees are two-fold. One reason is to have some compensation for the significant work to identify and contact the best company buyers for the business and the other is to have some “skin in the game” from the business owner. Businesses that are put on the market by owners who have skin in the game have a much higher probability of selling because the owner is more committed to selling.
The owners of smaller businesses need to recognize when the most likely buyer is a business rather than an individual. They then need to find a business broker who will do a targeted search for potential buyers – not all business brokers want to do these types of sales. Because their business is smaller, there are many more potential buyers than for a much larger business that only a few large organizations can afford. Also, because of their smaller size, it is likely that some potential industry buyers may not be identified. Some may be located out of the country. And, some individuals are potential buyers. That’s why, to be successful, the business broker needs to combine the targeted search with a good Internet advertising program. Just as with the Investment Banker or M & A Advisor, the business owner should be prepared to pay some upfront fee for this additional work and put some skin in the game.