In practice, both sellers and buyers have a different opinion on what is of value to them during a transaction. In this blog article, I want to analyze this “added-value” of an advisor through the eyes of a seller. In the next letter, I want to do the same from the point of view of a buyer.
The question of what value M&A advisors add in the eyes of a seller of a company is an important one as it determines how our clients see and appreciate our daily work. The answer depends, in my opinion, very much on the experience of a business owner with acquisitions and business sales. Has he or she acquired or sold companies before?
We get requests from a large number of possible sellers each year. Everyone with their own background, experience, and expectations. Often business owners reach out to us with the request for one of the buyers we have listed on our website. We are trying to make an overview of all active buyers in our core industries. Our objective is to show which buyers are active in the market and what type of acquisition targets they are looking for. For more details on these listings of buyers please visit: www.corporatefinanceineurope.eu/business-buy/wanted-european-companies-buy.htm
Of course, it is not possible to list all buyers and their requirements. Further, the requirements of individual buyers change over the years when business strategies change. However, we think it is valuable to show which buyers are active in different markets such as IT, plastics, automotive, transportation, pharma, and others. If we can show you the 100 most active buyers in your industry this gives you an indication of what buyers want, and which possible buyers might be looking specifically for your type of company. This might have some value for a business owner at the start of the preparation of their business sale.
I am not sure if most business owners see a lot of value in getting a thorough understanding of the process of a business sale. However, you have to have it right! The business sale must be a success. If the business sale is not a success everyone involved loses. When a business owner retires it is one of
your most important business decisions you ever make in your business life. A successful business sale is very important for the seller. Normally, it is the life work of an entrepreneur.
An owner will receive a nice check (or bank transfer in practice) for the sale of the company and receives a further compensation if the company develops well (via the earn-out construction). However, given it is also the life work of an owner there is much more than just financial motives. The owner cares about the employees, the brand name that has been built and the respect from the people involved. Therefore, an owner has a clear, and very high interest in making this work.
This means you must think through the process and understand the implications of your approach. Are you talking to only one buyer? Have you screened this buyer? Are you sure it is the right and best buyer for your company? Would it not be a plus to speak to multiple buyers?
What are the phases of the project where you should be careful? Which buyers will you approach, when and how is it best to do this? When do you give exclusivity to a buyer? Is it smart to use an earn-out construction?
You can determine or answer all these questions yourself, but it might be wise to discuss these with an experienced M&A advisor.
What is the value of my company? For which amount do I want to sell? What is the amount I need to retire? How will buyers value my company? Will I get paid right away?
In practice, we see most business owners overvalue their own company. I think there is much value here for an advisor that has practical experience with buyers and the way they value a company. If business owners knew about the valuations that are sometimes being paid in practice, some would probably not even start the sales process. In the end, an advisor a more objective view in regard to normal market valuations of companies. We will try to get as much as possible for your company, but we can’t change the laws of what buyers expect. The return that a buyer wants on their investment given the risk they often see in these smaller companies is a given. A buyer just wants its investment back in a certain number of years.
Let’s face it, the number of times when Facebook buys a WhatsApp and pays a crazy price is rare. This is not the daily practice for most of the sellers we come across. Of course, it is possible that a buyer pays a nice premium for a company that has a unique business position, patents or access to new markets. However, for the majority of companies, we can use the standard multiples based on profit figures. Theoretical valuation models are also something different and might confuse a seller.
How important is it for you to get a good practical idea about the valuation of your company?
How important is good documentation for you?
Making a financial model, a teaser and an Information Memorandum can be done in numerous different ways. The quality and content of the documentation will give a first impression to a prospective buyer. It might give an indication of how many possible buyers have been approached,
how competitive the process is, the quality of the advisors, etc. Is the market position of the company well described? Does it give an indication of what the alternatives are for buyer one compared to buyer two? Can the quality of the documentation have a material impact on the valuation of your company?
This buyers list (often called ‘long list’ and ‘short list’) is important as it should contain the final buyer of your company. CFIE has lists of buyers in its various core industries as we have been in touch with 100’s of buyers over the last 15 years in all our core industries. For many of these buyers, we have made buy-side profiles. Sometimes business owners have a good idea of the most suitable buyer for their company. However, often there are tens of possible buyers for a company that is not at all known to a seller. Industry specialists in a specific country might know a large number of possible buyers. Often, these advisors know the buyers much better than a business owner. Also, the advisors know thoroughly how a buyer looks at your company and what they value in your business.
How valuable is it for you to know the buyers of your company? Please give your opinion at the end of the article.
Is it useful for you as a seller to have an advisor next to you? Is the experience of an advisor useful for you to help in reaching a higher sales price? It is important to see the value from the point of view of a prospective buyer. Are you a good negotiator?
Are you familiar with M&A concepts like cash and or debt free enterprise value and what a normally required working capital is from the point of view of a buyer? It is important to know the practical implications for your company and how much additional value (or destruction of value) this can mean to you. Are you also able to negotiate additional conditions yourself? Please describe how much value you see in an advisor and what you expect from them in this regard.
What is the added value in the due diligence process? Will the DD be used by a buyer to delay the process or decrease the agreed valuation from the signed Letter of Intent (LOI)?
Do you see the value of an advisor in this part of the M&A process? If so, where do you think an advisor can add value in the DD process?
As a business owner, you will most often use a lawyer to help you when reviewing the SPA (Share Purchase Agreement). Although it is the normal business practice that a buyer drafts the SPA, sellers mostly use specific advice from a lawyer as well.
I have seen cases where an advisor was not present during the SPA negotiations. One case ended up with the seller walking away on the advice of his lawyer. The reason was that too many guarantees were needed to be given in the opinion of the seller. An M&A advisor that knows the buyer and the normal practice of the guarantees can help to explain these items and the rationale. One specific
example was that the buyer wanted to leave an earn-out in an escrow account for quite some time. This scared the seller and the deal fell apart. In the end, the seller needed to do an MBO at a much lower valuation. What is the advice of an M&A advisor worth in such a case?
Here is a summary of some of the instances where an advisor can add value:
Based on our practical experience, we know that organizing the sale of your company yourself might work. Doing a successful business sale with the right target though is what matters. Finding the right buyer is not easy at all. Using an advisor will give you the highest chance of a successful business sale.
What is your opinion on how sellers should approach a possible business sale and where specifically is the added value of an advisor?
Please share your opinions below :)