Business owners often make the mistake of undertaking the task of selling their own companies. Having successfully led an enterprise, many have a take-charge attitude, as well as an entrepreneurial penchant for risk taking. These leadership qualities are highly admirable, and are the main reason for their business success. However, business owners also can be deal killers in the complex and lengthy process of mergers and acquisitions (M&A). Here, we'll cover the role the M&A advisors play in the M&A process.
TUTORIAL: Mergers And Acquisitions 101
Why Choose an Advisor?
Businesses, particularly smaller companies, often experience dynamic challenges in the course of their operating histories. There may be opportunities to grow the business, expand into a new region, gain market share, diversify product and service offerings or increase research and development (R&D).
Such proactive strategies are either in reaction to or anticipation of market changes within an industry, and typically necessitate the infusion of capital into the company operation. Scenarios may not be so positive. Smaller companies are much more susceptible to bankruptcy for a variety of reasons. Management may be lacking in experience and talent, competitors can cut prices or the product offering may diminish in competitiveness due to globalization. Owners may wish to merge or acquire other companies that are complementary to their own operations. Alternatively, owners may wish to sell their business due to high premiums being paid by the market for companies within their industry space. (To learn more about M&As, check out Merger - What To Do When Companies Converge.)
Intermediaries, investment banks and business brokers act as M&A advisors in order to facilitate a capital raising merger or acquisition transaction on behalf of a client. Good advisors are typically incentivized based on what the client is attempting to achieve. Thus, if a seller wants to sell a business, advisors may be incentivized to maximize the company's enterprise value by identifying and introducing sufficiently aggressive acquiring parties that have the capital and the value drivers to justify paying a high price. Owners, however, can be averse to paying high absolute dollars to M&A advisors, and thus they undertake the process themselves.
The High Cost of Inexperience
Missteps in M&A can be costly and time consuming due to the complexity of the process. Sellers may lose millions of dollars by not securing the optimal price for their businesses. Company owners are usually high-net-worth individuals, but a vast majority are not trained in deal structuring and are not aware of various options that can make a deal succeed. Sellers often become overwhelmed by multiple buyer interest, and are not able to ascertain the serious suitors from those that are merely deal shopping and bargain hunters. The due diligence process involves meticulous accounting, tax, legal and operational assessment of a company, and requires stacks of paperwork and fine print. Tax discussions can be exhaustive, and can cover details such as tax-loss carry forwards, tax credits and their timelines, various corporate structures (such as C corporations versus S corporations), a host of regulatory filings, jurisdictional issues and estate planning, among others. Indeed, too many owners ignore running their businesses (and increasing enterprise risk) during the selling process.
Sellers' lack of expertise in M&A can lead buyers to downright take advantage of an unsophisticated owner by offering intricate, yet risky and highly unacceptable, terms. The owner may be enticed to accept a lower price valuation for his business in exchange for stock in the combined entity. However, the acquiring party can dilute and depreciate the value of this equity down the road. The seller may also be lulled into keeping certain portions of the company's liabilities when an assertive advisor may be able to negotiate these away (particularly if the company is in an attractive industry). (For related reading, see M&A Competition Is Cutthroat For Acquirers.)
Seeking an Advisor
When a corporation is seeking an advisor, it should look for a highly experienced, trustworthy and honest individual (or team of individuals) that solely acts in the seller's interests. That means the advisor has the internal fortitude and character to advise "walking away from a deal" (and receive less compensation as a result) if circumstances warrant it. Look for, and study, past transactions conducted by the individual (and his or her firm). The seller may be attempting to sell the business for the right price, but the advisor may be more experienced in debt financings and other forms of raising capital.
Significant industry experience translates to advisors understanding the critical operational components of the business (thus avoiding being sidetracked by somewhat important but less critical details). Individuals (or firms) who have specialized in a particular industry are most attractive, as different companies command different pricing multiples according to the sectors in which they compete. The advisor should know which investment groups or strategic companies are particularly assertive in acquiring similar companies (and the reasons for such acquisitions). The ability to identify and create good rapport with a variety of suitors (and understand the value drivers they bring to a target company) can be worth millions of dollars to a seller - found in the form of an attractive offer and deal structure.
Accounting and legal know-how are obviously expected. If a company has a particular risky aspect, such as environmental or tax issues, the advisor should have a ready network of external parties that can advise on each area. Additionally, experienced advisors can suggest various deal structures such as a recapitalization, in which the owner leaves a minority stake in the business, or in seller financings. In a recapitalization, the seller is able to get cash off the table, and is able to realize additional value for the company down the road. Advisors should find out the various operational and strategic flaws in the business and convey these upfront to potential acquirers. This prevents surprises down the road and helps with the filtering process of initial suitors.
Searching Out the Great Advisors
Great M&A advisors go beyond the company to find out the professional and personal objectives of the seller and match the deal structure according to these objectives. For instance, the owner may insist on an unreasonably high price for his business even though he may have more modest personal financial objectives. In another example, the seller may insist on selling his entire equity stake in the business when the acquirer will pay a higher price (for a longer time horizon) if the seller will leave a small stake in the business and help with the integration process. Aligning personal objectives with the sale of the business means that the advisor has a network of highly capable and trustworthy investment professionals to handle the newly liquid assets post transaction. Additionally, the M&A advisor can walk the seller through massive changes in his or her personal and professional life after the sale of the business, an often drastic and dynamic shift that results in a volatile period for an individual who runs a successful business and is suddenly left with no office to head to in the morning. (Read The Wacky World of M&As for more information.)
Rapid communication cycle times can significantly speed up a transaction, thus the advisor should be able to effectively coordinate with the company's operations manager, accountant and attorneys, and provide a checklist of information necessary for conveyance to acquirers. Fast communication by multiple parties is very important because bottlenecks too often drag out the process. In worst-case scenarios, a lengthy process can literally bankrupt a company (if the owner is looking to raise cash), materially lower the acquisition price (due to changing market conditions) or increase tax liabilities (due to changing legislative initiatives).
It is possible to undertake the M&A process individually. However, owners who undertake this process themselves risk significant value. Good advisors are competent, experienced individuals who are able to effectively coordinate the sale of a business. At the very least, they are competent in advising on a variety of deal structures. Great advisors, however, have deep industry expertise, and can tailor the transaction specific to the market segment and to the objectives of their clients. Additionally, they align professional objectives (including asking price) to the seller's personal objectives, temper unreasonable valuation expectations, identify acquirers that bring optimal value drivers to the target company, have a network of highly capable external advisors (such as estate planning professionals), and advise on dramatic changes in the owner's lifestyle and psyche after the transaction. You can do it alone, but with all the positive attributes that good advisors can bring to the table, why would you want to? (For more, read The Basics Of Mergers And Acquisitions.)