The Role of M&A Advisors

When evaluating critical decisions about exit options for their business, an alarming number of CEOs and business owners make the mistake of believing that their lawyer or accountant can advise on and execute a transaction.

But you wouldn’t ask your general counsel for advice on corporate taxes, or your accountant for counsel on intellectual property rights, so why is it that business owners take this approach for advice about selling their business?

In our experience, the answer is a problem of “you don’t know what you don’t know” — many business owners simply don’t understand enough about M&A professionals to make an informed decision about whether or not to hire one.

The cost of ignoring this critical role in a business sale can be astronomic, so before you decide to go it alone or turn to others for advice, make sure you have a full understanding of what an M&A advisor can do for you.

What is an M&A advisor?

M&A advisors are professionals who primarily advise on and execute transactions involving the acquisition or sale of a business. They can represent either the buyer or seller, but for the purposes of this discussion, we will look at their role on the seller’s side of a transaction.

You may also encounter other labels for M&A professionals such as “business broker” or “investment bank,” and while there are subtle differences in how each approaches a business sale, we will ignore those distinctions in this post.

Before the sale

An M&A advisor plays a critical role both before and during your sale.

Long before your sale, your advisor seeks to understand your post-sale goals, both financial and non-financial, and prepare you to achieve those outcomes. This means that they will not only give you guidance on valuation expectations and what you need to improve the ultimate sale price, but also structure the sale in a way that takes into account non-financial considerations that may be important to you.

In addition, depending on whether you want to sell your business internally or externally, a good M&A advisor can help you understand the universe of options available to you. For example, if you want to sell the business to family or friends, a management buyout (MBO) or an Employee Stock Ownership Plan (ESOP) may be most appropriate. In the event you choose to pursue an external buyer, an advisor can also help you weigh the pros and cons of selling to a financial buyer vs. strategic buyer.

During the sale

When it’s finally time to move forward with a transaction, your advisor moves into a full-time execution role.

Before we dive into the specifics of their role at each stage of the sale, it’s worth noting that aside from the inherent value they bring in running the transaction in and of itself, an M&A advisor also enables you to focus on running and growing your business as the transaction occurs.

All too often, transactions are derailed because the CEO or owner is so distracted by the sale and the performance of the business deteriorates.

Transaction Preparation (1-3 Months)

The transaction itself begins with the preparation of marketing materials. Specifically, your advisor will put together a “teaser” that markets your business’ highlights and transaction goals.

Because private equity buyers and experienced corporate acquirers typically review hundreds if not thousands of teasers every year, your advisor’s expertise in preparing the teaser can drastically increase the number of parties interested in your business. In addition, having an advisor protects the confidentiality of your sale process as the teaser usually blinds your company’s identity.

At the same time, your advisor will also begin compiling a buyer list. Your advisor’s transaction experience and industry expertise will play a large role in their ability to build a diverse buyer list that not only helps maximize your potential valuation, but also enables you to achieve your non-financial transactional goals.

Remember that a healthy middle market business has a universe of 200-300 likely buyers, and an advisor will maximizes the chances that you cover every one of them.

The Transaction (3-9 Months)

Eventually your advisor will take your company “to market.” This simply means that they start reaching out to potential buyers, with the goal of narrowing down candidates that are not only interested in your company, but are also compatible with your transaction goals.

As the process continues, you’ll start receiving more serious expressions of interest in buying the company. These are known IOIs (indications of interest) and LOIs (letters of intent).  IOIs are less formal letters confirming a buyer’s intent to purchase a company and usually include valuation guidelines, transaction structure and other terms, due diligence expectations, and a timeframe for closing.

LOIs are more formal, legally-binding agreements that serve as a precursor to the purchase agreement and describes the proposed transaction in more detail. The execution of an LOI almost always gives that buyer an exclusive period during which to conduct final due diligence before the transaction closes.

If you’ve managed to retain interest from multiple buyers at this stage, your advisor has done a great job so far. However, their job is far from complete — they should continue to negotiate the final terms of the sale. Your advisor’s ability to negotiate on your behalf can not only come in handy because of their experience in leveraging buyers against one another for the best terms, but also because they serve as a buffer to prevent any hard feelings in the negotiation process from affecting your relationship with the buyer post-sale.

Once you sign an LOI, your advisor will also be responsible for ensuring a seamless due diligence process, which should conclude with the signing of the purchase agreement – the document which seals the deal.

So What Now?
Choosing a qualified M&A advisor maximizes your chances of selling your business at the highest price possible.

However, understanding what an M&A advisor does and the value they can bring is only step 1 of the process.

Selecting the right advisor is the bigger challenge for most business owners – hiring the wrong advisor can actually end up costing you more money and time and worsen your outcomes, not better it. So it’s equally important to understand how to find and vet the M&A advisors that are best qualified to represent you in a sale.

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