Business brokers will say various things to convince sellers they are the best possible agent for you to sell your business. Examples include: buyers are currently paying high prices in your sector, or I have the prefect buyer for your business
How do you separate fact from fiction and secondly, how important are buyer relationships? Recently closed transactions in the space and client references from those deals are verifiable evidence of capability and up-to-date market knowledge.
You need a company champion
However, they should not be the only factor in choosing an investment banker to advise in the sale of a business. Having done deals in a sector renders the mandate more efficient for the advisor by: (i) knowing up-to-date acquisition terms and pricing and (ii) the appetite and ability of potential buyers, but securing a number of desirable offers is ultimately what the seller is looking for. To achieve that you need an advisor who will work tirelessly on your behalf, not just forward the first offer received and pressure the seller to take it. You need a company champion who will spend the time, leave no stone unturned and who will fight for your best interest. Having done deals in the sector may lead to short-cutting the process believing that certain companies are active buyers and others are not buyers at all. Such assumptions will limit the potential that could otherwise be achieved.
Look for the platform buyer
As I have noted several times, the best buyer is not likely to be a direct competitor (who could not pay a strong price if they were just interested in acquiring the customer base) but a “platform buyer”. A platform buyer will be interested in the business for one of three reasons, its customers, its personnel, or its technology. Platform buyers are good buyers because they typically leave the existing assets in tact (brands, people) and usually bring a growth opportunity that allows them to pay a good price and provides the company sold with new opportunities.
Use an experienced advisor
So should buyer relationships drive your choice in investment bankers? An advisor knowing a CEO who wants to buy your business (even if for argument’s sake that company is Cisco or Oracle – pick any leader in its space) does not guarantee a good price or even a good offer. Only by going to market with an experienced advisor who (i) understands the business and has presented the opportunity strategically, (ii) conducts a thorough process and, (iii) has the time and interest to put your company first, can you secure the best price for your company.
Buyers are Currently Paying High Prices for Businesses Like Yours
Another business development tactic that business brokers sometimes use is to say buyers are currently paying high prices in a particular sector. For example, after Facebook offered $1 billion for Instagram, advisors might approach other photo sharing application companies and say, because Facebook offered $1 billion, there will be other buyers also interested in paying a high price for your company. When presenting their credentials, M&A advisors will often include market stats such as recent publicly available acquisition terms of similar businesses and a sample of comparable publicly traded valuation multiples (comp tables) to provide a potential seller with a basis for value expectations and engage the potential seller in a value discussion.
Look beyond the headlines, not all buyers are the same
While recent transactions and comp tables can be helpful to show broad trends, interpreting them to determine expected sale price is fraught with pitfalls. When comparing your company to recent sale transactions you need to examine many possible differences in company risk and future prospects. The following are just some of the questions that should be considered: is the company in question of the same size, does it have more or less customers, does it have patents, a defensible product/service differentiator, are the margins the same, historical growth rate, is there debt or redundant assets, was the debt included in the sale, etc. In the case of publicly traded company valuation multiples, it must be recognized that these represent shares trading at a minority discount (a minority discount applies because, as a single shareholder of a public company, you have little influence over its corporate decisions), control blocks typically sell for 30% to 50% more. There is an old statistics joke that goes as follows: “he uses statistics like a drunken man uses a light post, for support rather than illumination.” Recent transactions and comp tables can be used in the same way.
Agree on the target outcome
Keeping in mind that recent/current market activity can only be a rough guideline and that no one can predict what the results of a well managed auction between two or more motivated strategic buyers will be, it is nevertheless imperative that the seller and the M&A advisor agree on the expected sale price range before the divestiture process begins. The best way to align the seller’s and advisor’s interests is to agree that the bulk of the advisor’s compensation be tied to achieving the mutually agreed sale price range (having said that, I also think it is fair that the advisor receive some level of work fees in order for him/her to get comfort that the seller is taking the process seriously – however this work fee could be credited towards the success fee).
Use an experienced advisor
To put it mildly, M&A advisors will put their best foot forward in their presentations to convince sellers to use their services and, as usual, it is a case of buyer beware. Don’t believe all that you hear and see and look beyond the pitch to the firm’s history, reputation and particularly the lead banker’s character. At the risk of sounding like a broken record, only by going to market with an experienced advisor who (i) understands the business and has presented the opportunity strategically, (ii) conducts a thorough process and, (iii) has the time and interest to put your company first, can you secure the best price for your company.
Recommended Further Reading
For more on what to consider when choosing an Advisor, see: 5 Things you Should Know About your M&A Advisor