Navigating Sell-Side M&A: A Guide to Understanding and Executing a Strategic Sale of a Business.
Part 2. Why Do You Need M&A Advisors?
When it comes to selling a small business (which we define here as less than $30M/yr in Revenues), there is often a temptation to go-it-alone, rather than engage M&A advisors. It may be that the confidence, intelligence and aptitude that were valuable in growing the business are assumed to apply to the sale of the business, or it may be that the expense of Advisors fees is considered to be “too much”, but for one reason or another many small owners at this size feel they can sell their business themselves (whereas larger firms with more seasoned executive teams will always engage advisors). Taking on the sale of what is likely a founders’ most valuable asset is an extremely expensive way to “learn M&A”.
Obviously, as M&A advisors, we have admittedly biased views on the matter, but this perspective has been formed over the years of encountering Sellers who played their hand poorly and the opportunity of a life-changing exit dissolved in front of them. Just recently, we came across a business that operated in the exact category that we had just completed a deal at a high valuation. This company represented themselves in their sale and received a valuation that was ~1/4 of what they should have received, and indeed would have received with the right advisors. Those advisor fees that are nominally “too much” would have generated an ROI in excess of 36x.
In fairness to small business owners, getting the attention of investment banks or M&A advisors when the business is less than $30M in revenue can be difficult, and even then, getting experienced practitioners to curate the sale of your most valuable asset can be difficult. That said, there are niche / boutique firms like Bravery Group who specialize in very defined industries and assist businesses in their sale across the spectrum of size. These boutique advisors focus on companies that are “specialized” and that have a unique market value proposition.
PASSIVE VS ACTIVE DEAL ORIGINATION
Businesses get acquired because they were either approached by an interested Buyer (Passive) or they ran an M&A Sales Process (Active). The former is often conducted as a two-party process and is usually a somewhat opportunistic development while the latter is a formal process requiring a multitude of parties.
When a company is approached by a potential Buyer, the asymmetry of information is detrimental to the Seller, who needs to obtain context from somewhere to effectively evaluate the offer. Usually they could do better than the initial (unsolicited) offer, either in terms of outright valuation or in structuring the deal in a manner that reduces risk. An experienced hand at this critical step can mean the difference between a middling offer and a “life-changing” one.
Even if the original offer appears very attractive, it is a common technique of certain types of Buyers to make an attractive nominal offer with subtle clauses that make the effective valuation significant less, all the while working to further dilute the price throughout the process of getting to a close.
Another common tactic is to undervalue the target while paying (mostly) with equity in the acquiring company with the promise that this equity will increase in value. The dynamics of this rarely work out beneficially for the original Sellers.
An M&A advisor will guard against such “gamesmanship,” and having an advisor on board will usually change the dynamic of the relationship between the parties to one of clinical professionalism.
The goal of an active process is to substantially increase the volume of buyer interest and a strong understanding of market dynamics, demand for specific solutions or services, market valuation, and competitive performance benchmarks all contribute to this. Often Sellers hear anecdotes about a similar firm receiving an attractive valuation and assume they can earn the same themselves. However, not only may this anecdote be inaccurate or not reflect the firm they’ve built, but Sellers still need to find such buyers.
To run an active sell-side process requires an M&A Advisor – and preferably one with a depth of related industry knowledge. When assessing between “going it alone” or working with an M&A advisory, it’s important to note the specialized activities that an active process entails:
- Guidance and Support: Selling a business is a significant undertaking. This is not hyperbole; Sellers are constantly surprised at the pressures and effort that goes into getting to a close – even with Advisors engaged. Furthermore, any acquisition process needs to happen in parallel with the continued growth and optimization of the business – as that is what potential Buyers expect of a Seller. This is not the time for online searches in an to attempt to understand what’s being asked of a Seller.
- Market Knowledge: Knowing the markets’ current value of specific offerings and capabilities is imperative to selling well. If nothing else, Sellers should know what their Discounted Cash Flow valuation is and what similar companies were acquired for over the last few years.
- Strategic Knowledge: A solid advisor knows what the strategic assets of your business are – i.e. the attributes that a Buyer will be able to leverage for their own benefit. For example, if a Seller has IP that improves common processes, this is something that a Buyer might utilize across their entire customer base.
- Go-To-Market Strategy: Advisors help with developing the sell-side process and go-to-market (GTM) strategy, including financial and strategic positioning, target Buy-Side lists and priorities, messaging and value proposition. Advisors might also help pre-stage many of the hundreds of due diligence artifacts that will eventually be requested.
- Go-To-Market Preparation: Many smaller companies do not present their financials or track their business in a manner that a buyer would want to see. Advisors can assist in compiling such information in a industry compatible manner.
- The Confidential Information Memorandum (CIM): This is the marketing document that makes a case for your company, and potential Buyers expect to receive in order to determine their interest levels. The quality of the CIM has a significant impact on the level of interest and Bravery Group is recognized for creating CIMs that effectively convey the business, market, opportunity and financial performance in a concise manner that’s valued by Buyers.
- Buyer Relationships: Some advisors will plaster the world with your company’s details in the hope that someone somewhere decides to take an interest. A valuable advisor has relationships in the industry in which a business operates, resulting in Buyers having trust that the opportunity aligns to their strategic objectives.
- Separation from The Buyer: In many instances there are times when the negotiations and positioning can be problematic and even antagonistic. It is much better to have an advisor have those discussions on behalf of the company in order to avoid creating negative relationships with any future colleagues.
- Knowing the Process: As we will dive into in a later article, an acquisition is a very well-defined process with certain necessary steps to be undertaken in a very precise manner. There are processes and techniques that will solicit a higher price for a Seller.
- Knowing the Games: Most Buyers are reputable, but a naïve Seller presents quite the temptation. The CEO of a highly acquisitive software company instructed his M&A teams to “be fair” with owners who were representing themselves, but that was a rarity and on too many occasions, owners are taken advantage of because they don’t understand the implications of what they are agreeing to.
- You have a business to run: A Buyer is going to expect that the business they just bought is growing and doing all the things that were espoused during the process. The time demands are taxing even with advisors. Losing focus (and momentum) because the owners elected to run the process without advisors is a risk to the agreed valuation via a weaker trailing twelve months (TTM) and a future growth negatively impacted by a lack of operating focus during the months of Due Diligence.
RETURN ON ADVISOR FEES
At 2-8% of the valuation (depending on deal size etc) advisors are not cheap in absolute dollar terms, and there is a natural temptation to try and save by going it alone. In addition to all the support noted above, an advisor should generate a better offer (in terms of valuation, structure and buyer profile) – and if the advisor only increases this valuation by the amount of their fees (a trifling increase), the seller is back to breakeven. This should not be a difficult decision as an advisor is expected to increase the received valuation substantially.
Ultimately, while the decisions related to how a company is taken to market for a strategic sale are influenced by a number of factors, electing to “go it alone” is one that should be taken very seriously, as should the specific selection of M&A advisors.
You can reach the author, Paul Newton, at email@example.com should you have any questions or simply want to learn more about the M&A process.