February 8, 2016
By Marc Prosser on February 5, 2016
If your business has $10 million in annual revenue, who do you turn to help sell your business? After all, you are still technically a small business but are worth more than many small business broker’s are used to handling. One place to turn is Cornerstone Business Services. The company specializes in selling companies with $2 million to $100 million in revenue or $500K to $10 million + in EBITDA. In 2015, the company was involved in 12 completed transactions.
I had a chance to interview the Scott Bushkie, the CEO of Cornerstone Business Services and Co-Founder of DealCoach, The following Q & A is reconstructed based on my notes and is not an exact transcript of the interview.
Why are your clients selling their businesses?
The IBBA/M&A Source/Pepperdine University quarterly Market Pulse Survey asks business owners why they are selling. The overwhelming answer we get, is that an owner is planning to retire and is not going to pass on the business to a family member. While not part of the survey, I believe there are a couple reasons business owners are choosing more and more to sell to a third-party versus keeping it in the family. For one, the children or relatives of the business owners often have a different skill set or passion that does not match up well with what it takes to run the business. The competition faced these days by small businesses is at least national, if not global, in nature. Thirty years ago, the competition was often regional and less severe. The level of competence and skills needed to successfully run a company with $2 million or $20 million in revenue is much higher now. Secondly, many children don’t want to take over the family business, even those with an entrepreneurial bent. We see some owners selling their business and providing children money to start their own companies. This allows the children to launch a business in a field of their own interest and doesn’t expose them to the immediate pressure of being responsible for 20, 50 or 100+ employees.
Who is your main competitor?
Our main competitor is actually the business owner, as some choose to handle the sale of their business without professional help. While there are dozens of books one can read about selling a business, they are not a substitute for actual experience. When a business owner decides to handle the transaction on their own, numerous studies have shown there is a much lower chance they will be able to complete the sale of the business. Only between 13% and 25% that are put up for sale, end up selling. Having a business showcased properly and presented to the right buyers makes a tremendous difference in completed transaction rates and sale price.
What types of mistakes do you see business owners make when selling a business without professional counsel?
Cornerstone is often hired by business owners after they have attempted to complete a sale on their own. Common mistakes we have seen include: forgoing a business valuation prior to starting the sale process, putting forward an asking price (depending on the size of the business), exclusively talking with one buyer and sharing too much information too early or without safeguards.
Many business owners shy away from doing business valuations, because they view them as expensive and unnecessary. A certified business valuation can cost as much as $30,000 or more. However, a business owner generally doesn’t need a certified appraisal. A broker opinion of value is much less expensive and conveys many of the same benefits. At Cornerstone, we charge $1,500 for such an opinion. Having an appraisal is very useful. It sets more realistic expectations for the business owner regarding their business’ value and gives them an objective yardstick for potential offers.
While we encourage a business valuation, we strongly discourage putting an asking price on a business for lower middle market deals. As all it does is put a ceiling on the value of your business versus letting the market dictate the true value. This best practice will make sure you don’t leave any money on the table.
How is the selling process different for a company with $3 million in EBITDA versus $300,000?
The biggest difference is the potential universe of buyers. The purchaser of a business with $300,000 in EBITDA is likely to be an individual, quite possibly someone who previously worked in the corporation. When you move past the $2 million mark in EBITDA, a business can attract interest from strategic buyers, family offices, and even private equity companies.
There are many reasons that there are different buyers for larger revenue businesses than there are with smaller. First, buying a business is an expensive process for the acquirer, even if there is no deal at the end. Between due diligence, lawyers, and accountants, a family office or private equity firm might spend $50K – $200K or more on the process. It doesn’t make much sense to spend $200,000 on the process to buy a company with only a few hundred thousands of earnings. Even more importantly, large-scale buyers only have the ability to look at a limited number of deals. That’s why they want to look at deal that has the greatest potential for the greatest impact on their returns.
Scott M. Bushkie. CornerStone Business Services Inc.
Scott founded Cornerstone Business Services, Inc. in the economic tumult of 2001 and celebrated its 10-year anniversary in the aftermath of the Great Recession. He didn’t survive some of the industry’s most trying years by chance. He did it by adhering to one simple philosophy: Honest conversations, superior results.
Today Cornerstone is one of the largest lower middle market firms in Wisconsin. Operating from offices in Wisconsin and Iowa, its associates have completed several hundred million in sales. The company fields worldwide interest in client opportunities and has led transactions with buyers and sellers based in Europe, Asia and Russia.
About the Author
Marc Prosser has been involved in many businesses as an executive, advisor, and investor. Prior to starting his own company, Marc Prosser was the first employee and Chief Marketing Officer of FXCM. During his ten years at FXCM, the company grew from a small business to over 700 employees.