Engaging A Merger & Acquisition Advisor Enhances the Probability of Getting a Deal Closed & Achieving the Maximum Price
What’s the difference between $33 million and $7.5 million? $25.5 million. Prior to engaging us, a client had tried to directly negotiate a deal with a buyer for $7.5 million. Although very upsetting to him at the time, the $7.5 million deal fortunately fell through. Subsequently, he engaged us to market the deal. Only 20 months after his unsuccessfully attempt, we sold his business for $33 million. If his prior deal had closed, he would have left $25.5 million on the table! A very costly mistake.
Why do I tell this actual story? The cost of not hiring a competent Merger & Acquisition (M&A) Advisor or Investment Banker can be quite substantial – calculated in aborted deals and millions lost.
When evaluating the sale of a business, owners sometimes ask “Why do I need to engage a M&A advisor? Based on my 20+ years of providing merger and acquisition advisory services, when boiled down, the two main reasons are…a competent M&A advisor significantly enhances the probability of (1) successfully selling the business (ie. getting a deal closed) and (2) achieving the maximum price.
But, why would a business owner not hire a M&A advisor? Based on my experience, it is the problem of business owners not knowing what they do not know. Many owners simply do not understand enough about the role of M&A advisors to make an informed decision about whether or not to hire one.
11 Reasons to Hire an Experienced M&A Advisor
The purpose of this article is to provide an overview of 11 primary ways an experienced M&A advisor provides value to clients during a company sale.
1. M&A Advisors Provide Credibility to the Seller.
Various surveys of business owners who sold their business cite that the most important reason they hired a M&A advisor was to bring credibility to their deal. Hiring a credible M&A advisor attributes credibility to the seller. It indicates to buyers that the business owner is serious about trying to sell his business.
This is a big deal considering many buyers review hundreds of deals before electing to pursue an acquisition. They do not want to waste their time. A credible M&A advisor elevates his client’s deal to the top of the stack and gets it noticed.
2. M&A Advisors Create Competitive Bidding Among Qualified Buyers.
The number one way M&A advisors ensure selling a client’s business for maximum price is to create competitive bidding among a number of qualified buyers – an auction. The competitive dynamic puts pressure on buyers to offer their “best” deal in order to win. Plus, the auction weeds out “tire-kickers”, who waste time. The competitive dynamic allows sellers to maintain leverage to negotiate the highest price and best terms to meet their goals.
3. M&A Advisors Drive the Company Sale Process, Navigating the Transaction Complexities from A to Z.
Selling a business is time-consuming and complex. A company sale process can take 1,000-1,500 hours spread over a 6-18 month period. Most business owners do not have that amount of time, staff or resources to devote to a company sale on their own. If attempting a company sale on their own, there is the real risk of becoming distracted to a point at which the business suffers. Nothing kills a deal faster than a performance decline.
Additionally, working through the nuances of a transaction is complex, requiring expertise, patience and control of one’s emotions. M&A advisors know how to manage this complex process. Ultimately, hiring a M&A Advisor takes the transaction pressure off the business owner and allows the owner to focus on what he does best – running his business.
4. M&A Advisors Assist in Setting Reasonable Transaction Goals and Expectations.
Before embarking on a sale process, owners should have clear goals and expectations they hope to achieve. If the goals and expectations align with reality, the chances of a successful company sale increase substantially. If mis-aligned with reality, the probability of a successful company sale is nil. M&A advisors can assist owners in understanding what is probable and possible as well as setting realistic expectations for a transaction.
5. M&A Advisors Advise on Market and Industry Trends, Valuations and Prospective Qualified Buyers.
M&A advisors should have a good handle on general market and transaction trends. Industry M&A specialists can advise on elements specific to the industry (valuation trends, prospective buyer appetite and financial ability to close a transaction).
6. M&A Advisors Help Prepare the Business for Sale.
To successfully sell a business, pre-sale preparation is critical. It results in three key benefits. First, preparation eliminates negative surprises to the buyer. Negative surprises kill deals. A M&A advisor will help the business owner identify any possible issues or risks and figure out ways to mitigate these risks before marketing the business to prospective buyers.
Second, preparation allows the M&A advisor to determine how best to position the company to buyers in order to have the most appeal.
Third, preparation relates to credibility with buyers (first point). Buyers quickly determine if a seller is prepared (or not) to consummate a transaction if a deal is struck. From a buyer’s perspective, prepared sellers demonstrate a genuine willingness and readiness to reach a deal, and once reached, an ability to close the transaction.
7. M&A Advisors Source a Wide Range of Buyers.
To create robust bidding for the client’s business, the M&A advisor typically compiles a prospective buyer list containing 100-300 possible buyers, many of which are unknown to the business owner. M&A Advisors provide the leg-work to identify prospective buyers, perform buyer research and help business owners uncover and understand the logical buyer groups.
After completing the buyer list, the M&A Advisor contacts all the parties and introduces the opportunity. This effort is part marketing and part sales with a heavy dose of tenaciousness to make sure the appropriate person within the prospective buyer organization reviews the deal. Experience, industry expertise and relationships play a large role in a M&A advisor’s ability to build a logical and diverse list of qualified buyers while getting these prospective buyers to take interest in the deal.
8. M&A Advisors Manage the Due Diligence Process.
Once a buyer and seller have reached an agreement on a deal, the buyer’s due diligence team (composed of accounting, tax, legal, environmental, insurance, lending and other consultants) gets busy. They request virtually every type of document, report, data and information you can think of. Due diligence is time consuming and requires much back and forth communication. Maintaining confidentiality is critical. M&A Advisors manage the entire due diligence process ensuring that the buyer’s team receives the requested information, often adding explanations and analysis, while also acting as a buffer for the client.
9. M&A Advisors Act as Client Advocates During Negotiations.
During transaction negotiations, M&A advisors play multiple critical roles. They act as advocate on behalf of their client to aggressively negotiate to obtain the best deal possible. They act as the central point for information flow and communications between client and buyer and ensure lines are open and messages are consistent and constructive. They act as problem solver figuring out ways to overcome difficult issues or deal hurdles. They can play “bad cop” as necessary and run interference on behalf of the client so he can maintain a healthy relationship and goodwill with the buyer as the process unfolds.
10. M&A Advisors Advise on the Optimal Transaction Structure.
What are implications of the transaction structured as an asset vs. stock deal? What portion of the deal should be cash vs. contingent consideration, such as earnout, seller debt? Should the client rollover a portion of his equity into the buyer’s entity? If so, how much? Should the client accept buyer stock? If so, how much and what are the protections? What is the role of the seller post-closing and what is his compensation? How is the non-compete structured? These questions give a small taste of the myriad items that must be analyzed and decided upon. Experienced M&A advisors help clients evaluate these and come to an optimal structure.
11. M&A Advisors Maintain Transaction Momentum.
The top three reasons deals die:
- company performance declines,
- during due diligence buyers uncover a negative surprise or risk, which cannot be mitigated or negotiated around, and
- time slips and momentum wanes.
A transaction has a natural flow. As the company sale process moves forward, momentum builds. Maintaining this momentum and urgency through closing is critical. Often, hurdles arise during the negotiations, which slow the process. These hurdles must be overcome as quickly as possible to keep momentum and the deal on track. Once momentum is lost, it is very difficult to re-start. M&A advisors play a crucial role in driving and pushing the deal along in order to maintain transaction momentum.
Why Business Owners Hire a M&A Advisor
So why does an owner hire a M&A advisor to sell his business? Experienced sellers of businesses consistently answer the question…the use of a M&A advisor to facilitate a transaction helps get the deal closed and drives demonstrable increases in value.