Category Archives: Choosing an Advisor

What Exactly Does an M&A Advisor Do?

In “How Does an M&A Advisor Add Value to the Divesture Process?”, I noted that M&A advisors typically charge between 3% and 7% as a success fee for managing the sale process for a company.  The question I addressed then was, will engaging an M&A advisor improve your expected sale value by at least 5%?

Here I would like to outline exactly what an advisor does in the process of a sale mandate.  At this point I am assuming that pre-mandate matters such as preparing a business for sale, value expectations and timing from a business and market perspective have been discussed and it is agreed that it makes sense to proceed.

The advisor side of the deal team typically includes a senior lead such as a Managing Director or Senior Vice President plus at least one Associate and/or Analyst as support.  In addition, there are usually international resources involved through foreign offices or foreign partnerships.  Depending on the language and culture of the region, these partners can do as little as buyer introductions to as much as negotiating and structuring deal terms.

An M&A advisor will: (i) position the selling company as a strategic fit for target buyers; (ii) present the opportunity to numerous logical and capable buyers; and (iii) manage the process along a defined and orderly timeline, in order to generate the highest premium possible.  We typically identify what we are responsible for in our engagement letters as follows:

– Conduct a review of the company in order to better understand the nature of its operations and value proposition to prospective partners including:

  • a review and analysis of the historical and prospective financial results of the company;
  • a review and analysis of operational, marketing, technical and other information regarding the factors that influence the cash flow prospects and risk dynamics of the company;
  • discussions with management regarding the operations of the company;
  • a review and analysis of public information and other available information pertaining to the company and the industry in which it competes, and
  • a review and analysis of transactions that have taken place in recent years among businesses whose operations are similar to those of the company.

– Prepare company overview materials in consultation with the company, which will provide prospective partners with an understanding of the nature of the company and allow them to assess value;

– Conduct a search to identify suitable potential partners, guided by any criteria provided by the company;

– Contact and screen potential partners;

– Assist the company in the preparation of due diligence documentation, a management presentation and related materials for review by possible partners;

– Negotiate with possible partners;

– Work with the company’s legal counsel, tax advisors and other advisors to assist the company in structuring the transaction so as to meet its financial objectives;

– Review the documentation in respect of the transaction; and

– Other functions as required in support of the transaction, and as agreed to from time to time.

The whole process may take six to eight months and the M&A team will spend somewhere between 400 and 700 hours on a file.  M&A advisors will have a lot of familiarity with legal documents and tax issues, but ultimately lawyers and accountants are required in the areas of due diligence, purchase and sale contracts, and tax planning.

M&A advisors often highlight how competitive bidding between several eager buyers resulted in an extraordinary price for their clients but, like the over-night success story ten years in the making, a completed divestiture relies on a foundation of thorough planning and process.

How Does an M&A Advisor Add Value to the Divesture Process: the Intangibles

In this post I want to comment on the non-price issues that could arise and how an M&A advisor can keep the process running smoothly and ensure the post sale relationships are started on the right foot.

The following are three areas where an advisor improves the chances of a successful transaction:

  • Allows the business owner to concentrate on running the business

I noted in “How Do I Attract a High Multiple for My Business: The Sale Process” that the selling process is one that takes seven to ten months to complete and that performing below expectations during this time could lead to serious delays and potential difficult renegotiation.  Creating the offering materials and contacting/informing suitable buyers alone is a full time job for the first several months.  Working with an advisor allows the principals and management to stay focused on the business and its performance throughout the process – the process can be long and distracting but the business should remain priority one.

  • Shows serious intent to complete a reasonable transaction

Retaining an advisor demonstrates serious intent of the vendor, ensures objective expectations have been set during the planning phase and makes buyers aware that they will be participating in a competitive and professional process; something which can be leveraged during negotiations.   The sale process is often an emotional one and having an objective advisor can provide independent advise and direction which otherwise might not be possible.

  • Creates a buffer during negotiations to ensure positive post-transaction relationships

Another role advisors play is wearing the ‘black hat’ during the process.  Not only during potentially heated negotiations, but any time the process looks to be stalling, the advisor can shoulder the blame in order to put the process back on track.  Keeping the principals one step removed during difficult negotiations allows them to maintain a positive business relationship as they work through a transition with the new owners.

The experience of having closed many transactions provides the benefit of a portfolio of workable alternatives available during negotiations and deep knowledge of structural pitfalls (for example, tying an earn-out to the lower end of an income statement) and last but not least, a network of strong deal-friendly lawyers and accountants.

What You Should Know About Your M&A Advisor

In the process of choosing an M&A advisor to manage the sale of your business, you will undoubtedly have a discussion about valuation and price expectations.  During such discussions, some advisors will lead you to believe they will secure a higher price than others. How much should you weigh such differences in your decision to pick your advisor?

It is enticing to go with the advisor that asserts your business should realize a price in the $17 million to $20 million range (advisors typically speak of indicative ranges) versus the one that suggests $15 million to $18 million.  How do you judge which one has a better handle on the market? Recent EOI/LOI’s from buyers in your sector would be nice but they are confidential, and your business is undoubtedly different in some significant way from the target companies.  You could examine the comp tables that typically accompany such discussions and the rational for any adjustments, but again, your business is unique.

While recent transactions and comparable trading analysis will indicate a certain price range has been achieved by similar companies in your sector, the way for you to realize the highest price for your business is for your advisor to spend the proper amount of time running a diligent and thorough process involving qualified buyers.

There are five things you should know about your M&A advisor to ensure you will get the time and attention you deserve.

Mandate Fit: If your business is worth $30 million and the advisor typically manages $100 million transactions, then you are probably not going to get a lot of the team lead’s attention (especially when (s)he lands the $100 million deal a month later).  It is comforting to have a big name representing your company but if the mandate is not a priority for the firm then you will not be well served.

Time Availability: Does your advisor have too many balls in the air?  If your advisor has four or more deals on the go then there will be a lot of competition for his/her time and, again, you will not get the attention you deserve.  You want someone who has the capacity and resources to serve your needs; the advisor’s time is finite.

Deal Team: Ensure that the pitch team is the deal team and you don’t suffer the bait and switch.  Some firms will have full time “rain makers” pitching prospects and other managers running the deals.  Make sure that you are meeting with the deal team lead and that you will get all of his/her time and attention.  The advisor deal team should include a senior lead such as a Senior Vice President or Managing Director with substantial negotiation experience plus at least one Associate and/or Analyst as support for research and follow-up.

Team Fit and Character: The advisor-seller relationship is a two way street.  The seller must place substantial trust in the advisor.  The M&A process is time consuming and can be highly emotional.  Over the 6 to 9 month process there will be some stressful moments and deal fatigue may set in.  A good advisor will keep you informed and with regular updates and discuss his or her strategy on an ongoing basis.

Compensation: Finally, how a banker is compensated should be considered.  Most payment structures involve a small monthly work/commitment fee and the lion’s share is paid by way of a success fee.  This works well because the advisor gets paid when a transaction is successfully closed.

While it is attractive to go with the M&A advisor that presents the highest indicative value range (because they somehow seem more enthusiastic about your business, more motivated to get you the best price), you will be well served to also understand your advisor’s typical mandate size, his/her workload, the team on the project and how they are compensated.

Selling your business is a once-in-a-lifetime event. If it is mishandled, serious value is lost.  You need an experienced team that acts with integrity, discretion and confidentiality and fully appreciates that a lifetime’s reputation is at stake.