Where do M&A advisors add value in helping business owners with the sale of their company?

What is this article about?

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.

Which activities have value for business owners in the light of a business sale:

  • What is the value of my company? How do buyers value a company?
  • Which documentation is required? How to prepare documentation and position a company for sale
  • Which is the ideal buyer for my company? List of possible buyers?
  • Help in the negotiation of a good price and other acquisition conditions
  • Support in the Due Diligence process
  • Help in drafting the legal contracts
  • Summary of items where an M&A advisor adds value and conclusions

Information about the process of a 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? How do buyers value a company?

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?

Which documentation is required? How to prepare documentation and position a company for sale

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?

Which is the ideal buyer for my company? List of possible buyers?

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.

Help in the negotiation of a good price and other conditions

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.

Support in the due diligence process

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?

Help in drafting the legal contracts

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?

Summary of circumstances where an M&A advisor adds value and conclusions

Here is a summary of some of the instances where an advisor can add value:

  • You limit your options of possible buyers and the target buyer might not be in line with your company strategy
  • You lose time in case it doesn’t work out directly if you speak to just one buyer
  • Your negotiation power is less given you only have one alternative (compared to speaking to more prospective buyers)
  • There might be many more and better-suited buyers out there of whom you are not aware
  • The chances of success are lower and the price you get might be lower
  • Resources: the acquisition process takes a lot of additional time. You will most likely only use your key people. This might wear them out and the chances your best people get stressed are high
  • Valuations: do you know the current market valuations? Put differently, are you sure you are not able to get more from a different buyer? Or ask too high a price that scares away your only buyer?
  • Time: if you have limited time you can be dragged into a drawn out process needing to start over when time is not in your favor anymore
  • If there is a cost motive, please also take the costs of your own time into account
  • You might lose focus on your own company and its situation could deteriorate

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 :)


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