Save The Commissions – Forget the Advisor!

Not surprisingly, the value of an M&A Advisor or business broker is often questioned. The intuitive reaction of a business owner is to question the commissions involved in selling a business and to try to avoid such “cost items.”

“Rarely, though, does a business owner take into account the opportunity costs of not selling at all, or of improperly or underselling a business,” says Achim Neumann, President, A Neumann & Associates, LLC, a leading New Jersey-based mergers & acquisitions and business brokerage firm. “We have seen a lot of scenarios where an improper transfer has resulted in many years of litigation after the closing.” So, what exactly is the role of a good transaction advisor?

Generally speaking, the advisor should help the business owner in preparing the business for a sale. This includes assembling all accounting records, checking the proper financial presentation, and establishing a coherent narrative about the business, especially its competitive advantages and growth prospects. Once that is established, an accredited third-party valuation should be obtained, not merely a “back of the envelope” value assessment, a common shortcut. Upon agreement about the value of the business, a comprehensive set of marketing documents needs to be prepared. A good advisor will be able to provide the right package to entice investors to take the next step.

“We have seen many poorly prepared marketing documents,” says Frank Arcoleo, Managing Director, Central PA and NY region, “missing essential information such as ownership structure, market position, or a description of key personnel.” As a matter of fact, without a qualified advisor and a properly prepared marketing package, the seller cannot make a “good first impression” – leading to the investor to heavily discount the contemplated purchase or to not pursue the business acquisition at all.  After all, if the business owner has such low standards in selling a business, why would standards be higher for its management?

The next step in the business sale process involves properly reaching out to investors. First, reaching investors needs to be done in a non-divulging way, so that the confidentiality of the sale is not compromised. Only advisors who have been in the business for some time have the network and experience to do this properly. Secondly, investors need to be pre-qualified to sort out any “tire-kickers.” Pre-qualification verifies that the prospective buyer has sufficient funds for the execution of an acquisition, and that the right non-disclosure agreements have been put into place.  All of this needs to be done while generating a healthy flow of buy side inquiries – no small task!

Once a business investor has been identified, introductions need to be arranged, facility reviews established, and an offer needs to be negotiated – one that can ultimately be converted into a final transfer agreement by the legal counsel of each party.  It is here that the deep experience of a well-established advisor can mean a purchase price several hundred thousands of dollars – or more – larger than it otherwise would have been.

The negotiation phase is also the point where the advisor acts as a “relationship buffer,” exploring the concerns of both parties and finding common ground for the key issues in order to propel the deal forward. This allows the parties not to be on the “front line” when being confronted by demands by the opposing party – an invaluable advantage to maximize the deal outcome and the post-deal cooperation during the transfer process.

Finally, in the due diligence and closing process, the advisor acts as conduit to facilitate the document flow ensuring that the deal “stays alive.”  “Not long ago, we actually had a business seller who wanted to increase the transaction price by 100% only two months after having accepted an offer from a buyer, and then to proceed to the closing table to sell the whole company, including the shares of his co-shareholder who was not appraised to any of the negotiated terms!” says Achim Neumann. “These are the type of scenarios where only a good advisor will be able to save a deal.”

One common saying is “Good advice does not have to be expensive, but bad advice will cost a fortune.”  This is nowhere more applicable than in the world of mergers & acquisitions and business brokerage.