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Best Advice: Get A Good Advisor

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When it comes to selling your company, it is difficult to over-stress the importance of knowing what is possible and what is not. An important part of a getting a good deal done is by having realistic valuations and deal terms.

There are some who believe that a private company, depending on industry and size, should be worth between 3 and 5 times EBITDA (some capital groups will not go above 2 time EBITDA, some will go in excess of 5 times. Thus, 3 to 5 times is a very general guideline).

The best way to find out what your company may be worth is by getting an Investment Banking advisor involved. Having someone in your corner who has done a bunch of deals in the past is a highly valuable asset when it comes to merger and acquisition transactions or simply raising more capital to fund expansion.

When your car breaks down, you take it to a mechanic to get fixed; when you need brain surgery, you go to a neurosurgeon; Why? Because these professionals have performed similar procedures many times in the past… so why in the world would you not go to an investment banking professional who has done many deals in the past when it comes to selling your company or raising capital?

If you are not sure where to find an expert in this field, start with your accountant or lawyer - the good ones often have a decent book of investment banking referrals. If you are unsure of how good they are, get references beyond your accountant or lawyer (both satisfied clients and industry experts).

IMPORTANT… if you really want to see how good they are, find out how many deals they've done in the last 6, 12, and 24 months - this is particularly important in this economy. You do not want to be carrying dead weight by wasting your time and money on a bad advisor.

Finally, many reputable firms engage in the biggest turn-off to SMB's: they ask for retainers or working fees. While logic dictates that, if they are so confident that they will get you the funding, they should do it simply based on success fees. However, there is another side to that coin - if they take on your deal and it is a lot of work to get funded, sometimes it makes sense for them to at least cover off costs for putting together a working proposal.

If they are just shaking hands and arranging meetings with low-level bankers and private investors you could get on your own AND still want to charge you work fees, then you are being ripped off. If they are making good senior banking contacts, building a time-consuming information memorandum and financials for you and they are at your beckon call, then it is worth a little compensation for the work they are putting into it.

All that said, if any investment banker tries to charge you $20,000 to get you a non-binding term sheet or arrange a few meetings, tell him not to let the door hit him on the way out. If they charge a reasonable fee based on the work they are going to put into the deal, and you agree that it is fair, then you may want to consider showing them a gesture of good faith by retaining them.

The bottom line is that investment banking advisors should be getting the large majority of their compensation based on success fees (i.e. a % of what they raise for you), not billable hours. If they try to charge more than 10% or are trying to deal in securities without a license, then they may be breaking the law (it is important for you to verify this based on where your business is located and where you are trying to raise funds). It is not unreasonable to expect a success fee in the range of 1% all the way to 5% or 6%, depending on the size and how difficult the deal is to do.

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Keywords: selling companies, valuation, exit strategies

About the Author:

Ian Harvey is a finance professional in the small and medium-sized business market. He works with owners and managers to help them gain access to capital and structure their financial, operations and business development affairs to meet the needs to today and goals in the future.

If you have any questions about the content of this article or how your business can benefit from working with Ian and his network of SMB partners, please visit www.smbedge.com/contact.html

About SMB Edge!:

SMB Edge! was created based on the fact that there are many Small and Medium-sized businesses (SMBs) without the resources or access to the information owners and managers need to make well-informed decisions in the current economy.

Please visit www.smbedge.com to gain access to the information and resources your company needs to thrive!

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Best Advice: Get a Good Advisor

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