It’s an old adage among lawyers: the one who represents herself has a fool for a client. That extends well beyond the legal world, and into business sales. A recent study published by Michael McDonald of Fairfield University conclusively demonstrates the value of hiring an M&A advisory firm. McDonald surveyed 85 business owners who used an investment banker to help sell businesses with values ranging from $10 million to $250 million between 2011-2016. Investment bankers greatly increased value, with 84% of survey respondents saying that the final price was equal to or greater than the initial estimate.
The owners outlined eight specific ways that advisors conferred value on middle market transactions:
- They helped structure the transaction to be as favorable as possible.
- They negotiated the transaction.
- They managed the sale strategy and M&A process.
- They educated the owner, helping to set expectations.
- They lent credibility to the sale.
- They freed management time to focus on running the business.
- They helped find and screen buyers.
- They prepared the company for the sale.
Participants emphasized the inefficiency of the M&A market for private companies, and added that investment bankers helped minimize the disadvantages of this inefficiency, while capitalizing on potential advantages. The areas of inefficiency the study highlights include:
- Market opacity. There is no stock market for middle market businesses, and almost no public information. No general list of private business owners is available, and public companies that purchases smaller businesses usually fail to disclose the purchase price and deal terms.
- There is a serious imbalance of information between sellers and buyers. Sellers have lots of information about their own companies, but buyers are significantly more experienced at purchasing companies. Sellers may also have poor financial and operational practices, making it even more difficult to communicate with buyers on a level playing field. Due diligence can be time-consuming and extremely stressful.
- The sales process is challenge and demanding, often taking a year or longer. Sellers may have to deal with unqualified buyers who disclose private information or waste time. They find the sale process distracting, which can make it more difficult for them to run their companies and grow profits.
Working with an investment banker remains the single most effective strategy for overcoming the many hurdles owners face. Your business will likely sell for more. Equally important, you’ll find the sale process less stressful. Your mental health matters, and can affect the health of your business. Protect both with the support of an investment banker.