Selling Your Technology Business – Business Broker or Merger and Acquisition Advisor

Most business owners only sell one business in their lifetime. The results of that sale can have a major impact on the financial future of the family. For most business sales we recommend that the seller engage a professional specializing in business sales to assist. There are two broad categories of professionals that engage in business sales – business brokers and merger and acquisition advisors. What should the seller be looking for? This article will discuss the type of services offered by both groups and help the business seller decide which professional to use.

Most business owners only sell one business in their lifetime. The results of that sale can have a major impact on the financial future of the family. For most business sales we recommend that the seller engage a professional specializing in business sales to assist. There are two broad categories of professionals that engage in business sales – business brokers and merger and acquisition advisors.

What should the seller be looking for? This article will discuss the type of services offered by both groups and help the business seller decide which professional to use.

The first criteria is type of business. Generally, business brokers specialize in €Main Street€ types of businesses such as dry cleaners, gas stations, restaurants, and convenience stores. M&A advisors specialize in more B2B types of businesses such as manufacturers, distributors, information technology firms, etc.

Size of Business – BB’s specialize in businesses under $1.5 million in revenues and M&A’s represent larger businesses or smaller businesses with a high component of technology or intellectual property.

The Targeted Buyer – BB’s are generally targeting individual buyers while M&A’s are seeking to locate corporate buyers.

Business Valuation – BB’s specialize in commodity type businesses that have €rule of thumb’ valuations that are consistently applied to arrive at a business selling price. There is usually a pretty narrow range of valuations applied to these businesses. M&A’s are recommended where there can be a broad interpretation of €strategic value€ and rules of thumb do not apply. A high component of Intellectual Property, a unique niche, a hard to penetrate customer base are characteristics that can demand strategic value and purchase prices can vary widely.

Complexity of Transaction – BB’s are generally selling to individual buyers that have a finite approach structuring the transaction. The contracts are usually fairly straight forward and the negotiations focus on price, financing, and seller notes. For the M&A’s the targeted audience is the corporate buyer with vast experience in acquiring businesses. They employ both an internal legal team and outside council and make the purchase contracts quite complex. The number one goal is protecting the corporation. The contracts are 35 pages of complex legal language and schedules of reps and warranties. The seller will need someone that is familiar in navigating in that environment. Corporations generally send in a due diligence team that is well versed on finding every little wart in a seller company and will attempt to reduce transaction value during the process. The seller will need good advisors to offset these pros.

Exclusivity – because the BB’s are targeting individual buyers, their audience is vast so exclusivity is sometimes required and sometimes not required. Business sellers often engage multiple non-exclusive BB’s to insure the broadest coverage in presenting their business to the buyer audience. BB’s are often part of a network of BB’s to help broaden this exposure. Sunbelt Business Brokers and BBN are two very good networks.

M&A’s require exclusivity because they are targeting corporate buyers and the audience of potential buyers is finite. These corporate buyers have M&A departments or sometimes the president handles the process. If a target is presented to a corporate buyer by more than one professional the credibility immediately drops and the chance of serious interest drops significantly.

Number of Clients Represented – BB’s want to represent as many business for sale as they can. When contacting their vast network of individual buyers it is a real benefit to have a vast inventory of companies. Because on this, their approach is more of a mass mailing, mass email, post the business on a business for sale Web site, type of approach and their attention is spread over 25 or more simultaneous clients.

M&A’s usually limit their number of engagements to 3 or 4 per professional at a time. Their approach is very hands on and labor intensive. M&A’s usually rely on a direct selling approach of calling the buyers and talking with the M&A department or the president. Often M&A’s will have specific industry niches and will have a customized data base of contacts. They often have had several prior contacts with the buyers and are able to penetrate the call screening that is set up to protect these individuals. A corporate buyer does not buy through a posting on a business for sale Web Site. A corporate buyer will open 2% or less of letter solicitations. A corporate buyer will read less than 1% of unsolicited and unknown emails. Corporate buyers demand personal and professional contact to get their interest.

Up-Front or Monthly Fees – BB’s generally will charge a minor up-front fee to begin the engagement or have a simplified valuation completed. Generally there is no monthly fee charged. M&A’s generally charge either a substantial up-front fee or a monthly fee in the $3500 to $10,000 per month range depending on the size of the business.

Success Fees – BB’s generally charge a success fee of 10% of transaction value. M&A’s generally have a sliding scale based on the anticipated size of the business. The known Wall Street firms that sell the mega businesses will not touch a transaction where they are not guaranteed $1 million in fees. The big regional firms require at least $750,00. The M&A firms that deal in the lower end usually charge considerably less than that with a minimum or $150,000 cash at close. If your transaction value is in the $10 million range, count on paying your M&A firm $300K to $400K.

Conclusions – The deciding factor is in cost benefit. An M&A firm is going to cost a lot of money and you are going to be paying either an up front or monthly fees without a guarantee of success. If your business is smaller and is a commodity type business or Main Street business where the target buyer is an individual, an M&A firm will not add much value and is not worth the fee.

If your business is larger, complex, unusual, strategic, with a high component of intellectual property or technology and subject to a broad interpretation of value in the marketplace, an M&A firm is the right choice. In the final analysis, is a swing of 20% in your company’s selling price worth $5,000 per month for 8 months?

Home Based Businesses – Business Or Hobby

Many people who engage in businesses run from home do so at what could really be called a hobby level. The various tax authorities of western countries all pretty much allow a certain latitude for activities run from home that also make some income, but not much. The US IRS and the Australian ATO amongst others have limits of how much can be earned and still remain in the hobby realm.

This is what the Australian Taxation Office says about whether you are a business or a hobby:

“How do I tell whether I am in business?

There is no simple answer to whether you are in business or not, it depends upon the facts in each case. However, you can use the following questions to help you determine whether your activity is actually a business:

Does your activity have a significant commercial purpose or character?

Do you have more than just an intention to engage in business?

Do you have a purpose of profit as well as a prospect of profit?

Is there repetition and regularity to your activity?

Is your activity carried on in a similar manner to other businesses in your industry?

Is your activity planned, organised and carried on in a business-like manner?

Does your activity have characteristics of size, scale and permanency?

Would it be true to say your activity is really better described as a business, rather than a hobby, recreation or sporting activity?

Each time you answered ‘yes’ to the questions above, it increases the probability that you are in business though no one indicator is decisive, they must be considered in combination and as a whole.”

Source: ATO Website 2009

The Internal Revenue Service of the USA says;

“Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.
In order to make this determination, taxpayers should consider the following factors:

Does the time and effort put into the activity indicate an intention to make a profit?

Does the taxpayer depend on income from the activity?

If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?

Has the taxpayer changed methods of operation to improve profitability?

Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?

Has the taxpayer made a profit in similar activities in the past?

Does the activity make a profit in some years?

Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year – at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.”

Source: IRS Website 2009

As you can see, both tax authorities have very similar ideas of what is a business and what is a hobby. HM Revenue and Customs of the UK is a little more confusing and approaches the issue in several ways, including hobby trades, pet breeding and so on.

Basically though the same thinking prevails. If it is part time, done for fun and barely covers costs then it is most likely a hobby and income derived is not taxable. Of course in that case it often means the expenses incurred are not tax deductible, either.

One of the benefits of being in business is the deductions you can claim for legitimate business related expenses. You can also usually claim a lower rate of tax on profits than you would if that income was salary. A business can run at a loss for several years and depending on the business format, indefinitely in some cases.

Think hard whether your home based business is a true business or a paying hobby. Always get professional advice on all accountancy and tax matters and never, ever try to rip off the Taxman. You will get caught and it is never worth it. The system is there to be used but not abused and there are more than enough ways you can pay your share of tax and not a cent more. Be creative, not criminal.