6 ms·

Broker commission: $88,900 Legal fees: $18,297 This equates to ~18% of total sale price. Most people don't realize how much get eaten up in deal/closing cos

Broker commission: $88,900 Legal fees: $18,297 This equates to ~18% of total sale price. Most people don't realize how much get eaten up in deal/closing costs. Congrats to him for the successful exit. Reading his blog post over the years should be eye opening to anyone just how hard starting/running a business is.

xyst 2y ago
A broker is just a middleman between the seller and buyer. What’s the value add for sales like this?
- robszumski 2y ago
  The broker was advising him on price point, strategy and fielding the interested parties for further discussion. Pretty important for this type of transaction.
  - not-my-account 2y ago
    How much of this can be learned by reading a couple books? I wonder how much higher profit he actually made compared to if one could self teach these skills.
    - ativzzz 2y ago
      I imagine the broker he used is fairly experienced and well compensated, so he'd have to learn a totally different profession from the ground up without any mentors or experienced people helping him, on top of continuing to run the business, which you can easily argue is worth $90k
    - bruce511 2y ago
      You can learn a lot of information from books. What upu can't get from a book is experience. In this case you have a seller with no experience, and ultimately a buyer with no experience. In either situation a broker is valuable. In the case of both its an enormously important moderator who can keep both parties on track to a successful conclusion. Book learning in such cases only gets you so far.
      - macintux 2y ago
        Also, LLMs not withstanding, you can’t pose questions to a book. Or even necessarily know when you should be asking a question you haven’t considered.
    - SkyPuncher 2y ago
      Practical knowledge, very little. Most of this value is in the soft areas, like how hard to push and how to manage expectations with the buyer.
    - brk 2y ago
      Having dabbled in some deals like this, books can give you some general ideas, but by nature they won't be current. A lot of things change quickly in the market, especially for smaller deals like this. A company or market segment that was getting a 5x valuation last year could be at 8x now, or 2x. Also, in many cases the buyers are more experienced than the sellers, though that doesn't seem like it was the case here. Your broker can help inform you, and prop you up. They can also act as the go-between for many communications, which can help mask feelings, worries, urgency, and other things that don't always help your position in a face to face conversation.
    - groby_b 2y ago
      About 80%. Which is great, if everything goes well. But if you're in the 20% that get to learn via failure, the cost is much higher to you. One of the core skills of being a founder is learning when to delegate.
      - deleted 2y ago
        [deleted]
      - deleted 2y ago
        [deleted]
    - darylteo 2y ago
      I have a bone to pick with "read book" purists... Books tell you what they did in their situation. They don't tell you what you should do in your situation.
    - xivzgrev 2y ago
      Just because you “can” self learn, is it worth the time to self learn? As he mentions in article the deal needs to move fast or one side may bail. If you have amateur hour seller, the buyer is more likely to back out. This isn’t AdWords where your landing page sucks, and you can just quickly pivot and get some more traffic. There’s only so many serious buyers of a business like this why risk squandering any of them. It’s a 15% commission to massively reduce the risk to seller and time commitment. Assuming broker is competent they’re going to get the deal done right. Seems well worth it to me. He also mentioned having a kid soon, so why drag it out? Dude already made almost a cool million what’s 90k in grand scheme of things to get deal done and money in bank? Skipping a broker in an extremely high friction transaction is penny wise pound foolish. If residential real estate hasn’t figured out yet how to cut out brokers, business acquisitions definitely have not
  - tradertef 2y ago
    Seems like exactly what real estate agents do. That being said agent fee of 3% seems too high to me..
- talldatethrow 2y ago
  If we trust the founder is smart enough to build a business worth x, he's smart enough to decide a fair commission for selling it.
- mtlynch 2y ago
  Author here. For me, the value of the broker was just someone to guide me through the whole process because I'd never done it before. It was good to have someone whose interests were pretty aligned with mine and who answered questions quickly and thoroughly without me having to pay by the hour. Another big part of the value was finding the buyer, as I probably couldn't do that on my own. I could have thrown a hail mary and listed the business for sale on the TinyPilot website and my blog, but the person who ultimately acquired the business definitely wouldn't have found me that way. Having gone through it, I would consider foregoing a broker in the future if I had some way of finding my own buyer, but I have no regrets about the broker for this sale.
  - elevatedastalt 2y ago
    In what way were their interests aligned with yours? (this is not a snarky question. usually in real estate their interest is to make the deal happen asap, which doesn't align fully with your interests)
    - nmog 2y ago
      Presumably the broker has a fixed % commission, so the broker is definitely incentivized to seek a larger deal.
      - apitman 2y ago
        GP may be referring to freakonomics. One of the things the authors point out is that it can actually be better for real estate brokers to crank out lots of sales rather than spend a lot of effort finding good deals for the seller.
        elevatedastalt 2y ago
        I was referring to common sense :) In real estate brokers typically get around 2.5%, so even if they find a buyer that is ready to pay 100K more, it's only $2500 extra (so probably $1500 after taxes). It's not a lot of money esp if they can invest that time and energy in parallelizing other deals. Time is of the essence in such transactions. And then of course a Buyer side agent's incentives are aligned exactly opposite to the buyer, but even if they would want to push for an early transaction above anything else.
- paulddraper 2y ago
  Depends on the seller. If you're already knowledgable, experience, and well-networked, there is less value. If you're not...well, have you ever sold a business?
- deleted 2y ago
  [deleted]
- wodenokoto 2y ago
  About $350k cash. Compare the serverCo offer with the final sale. The difference is the value added by the middle man.
ignoramous 2y ago
> how hard starting/running a business is That it is, but here Michael is explicit that most of the pain [0] was from doing hardware, software, and e-commerce all at once. Surely, there are other relatively easier businesses in tech? [0] Reminds me of Avery Pennarun's A profitable, growing, useful, legal, well-loved... failure (2012), https://news.ycombinator.com/item?id=3754531 https://news.ycombinator.com/item?id=3754531
- CodeWriter23 2y ago
  If it’s easy, everyone would do it.
  - WJW 2y ago
    ... by which time all the competition no longer makes it easy?
    - CodeWriter23 2y ago
      Nah the person/company willing to do the thing for the lowest margin wins out.
  - goralph 2y ago
    Would doesn’t guarantee could
    - CodeWriter23 2y ago
      Right. Easy guarantees would.
  - spiderxxxx 2y ago
    If it's easy, then there's probably not a lot of value in doing it either.
- SCUSKU 2y ago
  Thanks for posting that article, quite a throwback -- but first I've ever encountered it. Really great piece. I do think we've all been sold on the entrepreneur vision/lifestyle, but the unsexy reality is it's an insane slog that might not even pay off. It's always good to get these reality checks from time to time.
DowagerDave 2y ago
>> Most people don't realize how much get eaten up in deal/closing costs. They do if they've sold a house :)
gnicholas 2y ago
I thought the broker fee was relatively high given the revenue multiple. I imagine hardware businesses have different multiples that what I hear about (mostly software), but this strikes me as pretty modest. If correct, that means the broker's fee is mostly based on the price that the seller could have negotiated himself, rather than on the added value that the broker brought. OTOH, it's possible the work a broker does doesn't scale down with small deals, and he wasn't willing to work for less. Honestly, I'd rather accept $50k less and leave the broker out of it if that's the case.
codegeek 2y ago
And don't forget that a buyer spends a decent amount on their own lawyers, CPA etc during due diligence. I recently spent 10K on a deal.
surfingdino 2y ago
Don't forget tax.
Aurornis 2y ago
Common fallacy is to imagine that the exact same deal at the same price would have happened without a broker. A lot of people are going to look at this and imagine that if they just eliminated the broker, they'd get an additional $88,900 in their pocket. That's not how it works, though. Without a broker you may not find a buyer at all. If you do, you might not know how to price the business. Even if you could find the same buyer at the same price, they might be uncomfortable dealing with someone who doesn't know how to navigate the sale of a business and end up backing out. For some very small web businesses, you can usually get away with a broker. Nobody is dropping $90K on a broker to sell their $50K side project on one of those business buy/sell websites, obviously. However, once you get into the territory of niche hardware businesses, it's very helpful to have someone on your side who can help navigate the situation.
- dheera 2y ago
  > Common fallacy is to imagine that the exact same deal at the same price would have happened without a broker. > Without a broker you may not find a buyer at all. This only applies if your business isn't super profitable and you're looking to get rid of it. If you have a wildly successful business and you enjoy running it, you don't need to find a buyer, you can wait until one comes along.
  - Aurornis 2y ago
    Waiting for a buyer to show up with an offer is almost never optimal. A lot of sharks will show up and try to talk you down to low prices. Even if the business is wildly successful, a broker is going to help you shop for competitive offers and get the best price on the open market. And if your business is wildly successful and you enjoy running it, hiring a broker will let you focus more on running the business. Trying to learn how to sell a business is going to take you away from this hypothetical wildly profitable business that you enjoy running, which is neither good for your profits nor your enjoyment.
    - csomar 2y ago
      > Even if the business is wildly successful, a broker is going to help you shop for competitive offers and get the best price on the open market. Exactly. I once went with a broker (not the US, so lots of options not to) because the broker (despite his fees) will come out on top of other options. I guess, in that case, the broker did earn his commission fully. I think most people have a negative idea of brokers because in some jurisdiction they can make it difficult for P2P to happen. This makes the brokers a defacto monopoly on the market; and they usually all follow each other on the rates.

xyst 2y ago

A broker is just a middleman between the seller and buyer. What’s the value add for sales like this?

robszumski 2y ago
The broker was advising him on price point, strategy and fielding the interested parties for further discussion. Pretty important for this type of transaction.
- not-my-account 2y ago
  How much of this can be learned by reading a couple books? I wonder how much higher profit he actually made compared to if one could self teach these skills.
  - ativzzz 2y ago
    I imagine the broker he used is fairly experienced and well compensated, so he'd have to learn a totally different profession from the ground up without any mentors or experienced people helping him, on top of continuing to run the business, which you can easily argue is worth $90k
  - bruce511 2y ago
    You can learn a lot of information from books. What upu can't get from a book is experience. In this case you have a seller with no experience, and ultimately a buyer with no experience. In either situation a broker is valuable. In the case of both its an enormously important moderator who can keep both parties on track to a successful conclusion. Book learning in such cases only gets you so far.
    - macintux 2y ago
      Also, LLMs not withstanding, you can’t pose questions to a book. Or even necessarily know when you should be asking a question you haven’t considered.
  - SkyPuncher 2y ago
    Practical knowledge, very little. Most of this value is in the soft areas, like how hard to push and how to manage expectations with the buyer.
  - brk 2y ago
    Having dabbled in some deals like this, books can give you some general ideas, but by nature they won't be current. A lot of things change quickly in the market, especially for smaller deals like this. A company or market segment that was getting a 5x valuation last year could be at 8x now, or 2x. Also, in many cases the buyers are more experienced than the sellers, though that doesn't seem like it was the case here. Your broker can help inform you, and prop you up. They can also act as the go-between for many communications, which can help mask feelings, worries, urgency, and other things that don't always help your position in a face to face conversation.
  - groby_b 2y ago
    About 80%. Which is great, if everything goes well. But if you're in the 20% that get to learn via failure, the cost is much higher to you. One of the core skills of being a founder is learning when to delegate.
    - deleted 2y ago
      [deleted]
    - deleted 2y ago
      [deleted]
  - darylteo 2y ago
    I have a bone to pick with "read book" purists... Books tell you what they did in their situation. They don't tell you what you should do in your situation.
  - xivzgrev 2y ago
    Just because you “can” self learn, is it worth the time to self learn? As he mentions in article the deal needs to move fast or one side may bail. If you have amateur hour seller, the buyer is more likely to back out. This isn’t AdWords where your landing page sucks, and you can just quickly pivot and get some more traffic. There’s only so many serious buyers of a business like this why risk squandering any of them. It’s a 15% commission to massively reduce the risk to seller and time commitment. Assuming broker is competent they’re going to get the deal done right. Seems well worth it to me. He also mentioned having a kid soon, so why drag it out? Dude already made almost a cool million what’s 90k in grand scheme of things to get deal done and money in bank? Skipping a broker in an extremely high friction transaction is penny wise pound foolish. If residential real estate hasn’t figured out yet how to cut out brokers, business acquisitions definitely have not
- tradertef 2y ago
  Seems like exactly what real estate agents do. That being said agent fee of 3% seems too high to me..
talldatethrow 2y ago
If we trust the founder is smart enough to build a business worth x, he's smart enough to decide a fair commission for selling it.
mtlynch 2y ago
Author here. For me, the value of the broker was just someone to guide me through the whole process because I'd never done it before. It was good to have someone whose interests were pretty aligned with mine and who answered questions quickly and thoroughly without me having to pay by the hour. Another big part of the value was finding the buyer, as I probably couldn't do that on my own. I could have thrown a hail mary and listed the business for sale on the TinyPilot website and my blog, but the person who ultimately acquired the business definitely wouldn't have found me that way. Having gone through it, I would consider foregoing a broker in the future if I had some way of finding my own buyer, but I have no regrets about the broker for this sale.
- elevatedastalt 2y ago
  In what way were their interests aligned with yours? (this is not a snarky question. usually in real estate their interest is to make the deal happen asap, which doesn't align fully with your interests)
  - nmog 2y ago
    Presumably the broker has a fixed % commission, so the broker is definitely incentivized to seek a larger deal.
    - apitman 2y ago
      GP may be referring to freakonomics. One of the things the authors point out is that it can actually be better for real estate brokers to crank out lots of sales rather than spend a lot of effort finding good deals for the seller.
      - elevatedastalt 2y ago
        I was referring to common sense :) In real estate brokers typically get around 2.5%, so even if they find a buyer that is ready to pay 100K more, it's only $2500 extra (so probably $1500 after taxes). It's not a lot of money esp if they can invest that time and energy in parallelizing other deals. Time is of the essence in such transactions. And then of course a Buyer side agent's incentives are aligned exactly opposite to the buyer, but even if they would want to push for an early transaction above anything else.
paulddraper 2y ago
Depends on the seller. If you're already knowledgable, experience, and well-networked, there is less value. If you're not...well, have you ever sold a business?
deleted 2y ago
[deleted]
wodenokoto 2y ago
About $350k cash. Compare the serverCo offer with the final sale. The difference is the value added by the middle man.

ignoramous 2y ago

> how hard starting/running a business is That it is, but here Michael is explicit that most of the pain [0] was from doing hardware, software, and e-commerce all at once. Surely, there are other relatively easier businesses in tech? [0] Reminds me of Avery Pennarun's A profitable, growing, useful, legal, well-loved... failure (2012), https://news.ycombinator.com/item?id=3754531 https://news.ycombinator.com/item?id=3754531

CodeWriter23 2y ago
If it’s easy, everyone would do it.
- WJW 2y ago
  ... by which time all the competition no longer makes it easy?
  - CodeWriter23 2y ago
    Nah the person/company willing to do the thing for the lowest margin wins out.
- goralph 2y ago
  Would doesn’t guarantee could
  - CodeWriter23 2y ago
    Right. Easy guarantees would.
- spiderxxxx 2y ago
  If it's easy, then there's probably not a lot of value in doing it either.
SCUSKU 2y ago
Thanks for posting that article, quite a throwback -- but first I've ever encountered it. Really great piece. I do think we've all been sold on the entrepreneur vision/lifestyle, but the unsexy reality is it's an insane slog that might not even pay off. It's always good to get these reality checks from time to time.

DowagerDave 2y ago

>> Most people don't realize how much get eaten up in deal/closing costs. They do if they've sold a house :)

gnicholas 2y ago

I thought the broker fee was relatively high given the revenue multiple. I imagine hardware businesses have different multiples that what I hear about (mostly software), but this strikes me as pretty modest. If correct, that means the broker's fee is mostly based on the price that the seller could have negotiated himself, rather than on the added value that the broker brought. OTOH, it's possible the work a broker does doesn't scale down with small deals, and he wasn't willing to work for less. Honestly, I'd rather accept $50k less and leave the broker out of it if that's the case.

codegeek 2y ago

And don't forget that a buyer spends a decent amount on their own lawyers, CPA etc during due diligence. I recently spent 10K on a deal.

surfingdino 2y ago

Don't forget tax.

Aurornis 2y ago

Common fallacy is to imagine that the exact same deal at the same price would have happened without a broker. A lot of people are going to look at this and imagine that if they just eliminated the broker, they'd get an additional $88,900 in their pocket. That's not how it works, though. Without a broker you may not find a buyer at all. If you do, you might not know how to price the business. Even if you could find the same buyer at the same price, they might be uncomfortable dealing with someone who doesn't know how to navigate the sale of a business and end up backing out. For some very small web businesses, you can usually get away with a broker. Nobody is dropping $90K on a broker to sell their $50K side project on one of those business buy/sell websites, obviously. However, once you get into the territory of niche hardware businesses, it's very helpful to have someone on your side who can help navigate the situation.

dheera 2y ago
> Common fallacy is to imagine that the exact same deal at the same price would have happened without a broker. > Without a broker you may not find a buyer at all. This only applies if your business isn't super profitable and you're looking to get rid of it. If you have a wildly successful business and you enjoy running it, you don't need to find a buyer, you can wait until one comes along.
- Aurornis 2y ago
  Waiting for a buyer to show up with an offer is almost never optimal. A lot of sharks will show up and try to talk you down to low prices. Even if the business is wildly successful, a broker is going to help you shop for competitive offers and get the best price on the open market. And if your business is wildly successful and you enjoy running it, hiring a broker will let you focus more on running the business. Trying to learn how to sell a business is going to take you away from this hypothetical wildly profitable business that you enjoy running, which is neither good for your profits nor your enjoyment.
  - csomar 2y ago
    > Even if the business is wildly successful, a broker is going to help you shop for competitive offers and get the best price on the open market. Exactly. I once went with a broker (not the US, so lots of options not to) because the broker (despite his fees) will come out on top of other options. I guess, in that case, the broker did earn his commission fully. I think most people have a negative idea of brokers because in some jurisdiction they can make it difficult for P2P to happen. This makes the brokers a defacto monopoly on the market; and they usually all follow each other on the rates.