When it comes to selling a small business (defined here as less than $30M per year in revenues), there is often a temptation to go it alone rather than engage M&A advisors. The confidence, intelligence, and aptitude that built the business are assumed to apply to selling it. The expense of advisor fees feels like an unnecessary cost. But taking on the sale of a founder’s most valuable asset is an extremely expensive way to learn M&A, and one that most founders only fully appreciate in retrospect.
The Reality: Information Asymmetry
For most founders and owners, an exit is a once-in-a-lifetime opportunity to capitalize on years of risk and hard work. Meanwhile, buyers are experienced, repeat players with teams of seasoned M&A professionals. The information asymmetry in this relationship is profound and consistently favors the buyer, particularly when the seller is unrepresented.
Bravery Group recently encountered a business operating in the exact category where we had just completed a transaction at a high valuation. This company represented themselves in their sale and received a valuation approximately one-quarter of what they should have received. The advisor fees that were nominally “too much” would have generated an ROI in excess of 36×.
Passive vs. Active Deal Origination
Passive (Approached by a Buyer)
When a company is approached by a potential buyer, the asymmetry of information is detrimental to the seller. Without context, there is no way to know if the offer is a good valuation. An experienced advisor at this critical step can mean the difference between an acceptable offer and a life-changing one.
Active (Running a Formal Process)
An active sell-side process substantially increases buyer interest, competition, and valuation. It requires M&A advisors with deep industry knowledge, and preferably a firm like Bravery Group that specializes in the seller’s specific domain.
What an Active Process Requires
Running a formal sell-side process is not a part-time undertaking. The specialized activities that justify advisor engagement include:
- Guidance and support: Sellers are constantly surprised at the pressures involved in getting to a close, even with advisors engaged. The process must happen in parallel with continuing to grow the business
- Market knowledge: Knowing the market’s current value for specific offerings and capabilities is imperative. What were similar companies acquired for over the last few years?
- Strategic knowledge: A solid advisor identifies the strategic assets of your business, the attributes a buyer will leverage for their own benefit post-acquisition
- The CIM: The Confidential Information Memorandum makes the case for your company. Its quality has a significant impact on the level of buyer interest generated
- Buyer relationships: Valuable advisors have relationships with buyers in the relevant industry, creating trust that the opportunity aligns with their strategic objectives
- Separation from the buyer: There are times in negotiations when the discussions become problematic or even antagonistic. An advisor manages these exchanges so the seller does not damage future working relationships
- Knowing the games: Most buyers are reputable, but a naïve seller presents a temptation. Advisors guard against gamesmanship that can erode valuation through subtle deal structuring
- Protecting the business: A buyer expects the business they are acquiring to be growing. Time demands during a sale process are taxing even with advisors; without them, operational focus suffers
The Return on Advisor Fees
At 2–8% of the valuation, advisors are not cheap in absolute dollar terms. But if an advisor only increases the received valuation by the amount of their fees, a trifling increase, the seller is back to breakeven. This should not be a difficult decision.
In addition to all the support described above, an advisor should generate a materially better offer in terms of valuation, structure, and buyer profile. The overt cost of advisor fees pales against the hidden cost of going it alone: foregone strategic value that a skilled advisor would have surfaced and captured on the seller’s behalf.
The decisions related to how a company is taken to market for a strategic sale are influenced by many factors. But electing to “go it alone” is one that should be taken very seriously, as should the specific selection of M&A advisors, because not all advisors are equipped to capture the same outcome for the same business.