Whether to Pay an M&A Advisor, or not?

From a purely financial perspective, there are really two major objectives for an owner wishing to sell a business: (1) that the sale is actually successful, despite the many potential pitfalls along the way; and (2) that the sale produces the highest net proceeds to the seller.

Many sellers focus on only the second objective, maximizing proceeds, and as a result we sometimes experience prospective clients questioning the value of an M&A advisor.  After all, commissions involved in a business sale could be avoided as unnecessary “cost items.”

“Rarely 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 either the intended sale never took place, or in which an improper transfer has resulted in many years of litigation after the closing.”

Let’s take a look at how M&A advisors help owners achieve both objectives.  Selling a business is a process – a complicated process – not an event.  M&A advisors guide sellers through all the steps of the process. 

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 need to be prepared. A good advisor knows what investors are looking for and will be able to provide the right package to entice potential buyers to take the next step.

“We have seen many poorly prepared marketing documents,” says Gary Herviou, Vice President, Central NJ 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 acquisition at all.  

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 an 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.  

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.”  There are many ways that a deal can fall apart, even after an initial agreement has been reached.  M&A advisors work to keep the process on track to a successful close.

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.

Clearly, qualified M&A advisors have the knowledge and experience to perform those critical tasks that could not be performed successfully by the seller him/herself.

But what if having an intermediary actually increases the sale price MORE THAN the cost of paying a broker commission?

“Intuitively, we’ve always believed that we add a substantial amount of value to a transaction,” says Frank Arcoleo, A Neumann & Associates’ VP, Central PA, “but believing it and having evidence to substantiate such a claim are two different things.”

It’s hard to find any study to prove our worth.  You can’t look at the same business with and without an intermediary – it only sells once!  To compare different businesses might not be statistically valid.  We did find one study, however, conducted by Mercer Capital in 2007.  Although it’s 15 years old, we’ve seen nothing about it to indicate it wouldn’t still be valid.

The Mercer Capital study was done on banks, particularly small private banks, because it’s one of the few industries that has both enough available financial information about the banks themselves as well as about the transaction prices – the prices for which the banks were sold.  One might think that an analysis of bank transactions would not apply to them.  Instead, it might apply even more so.  According to a description of the study by Jay D. Wilson, Jr., published in their Mercer’s “Value Matters” newsletter, “The transaction data analyzed clearly indicates that transaction advisors play a very significant role in helping owners maximize the value received for their banks, despite the increased level of information available.”

How significant?  Controlling for bank size and other factors, says Wilson, “It was found that those sellers who utilized an M&A advisor received substantially higher pricing multiples and were more likely to maximize the value received from their investment.”  Furthermore, “Those banks sold with the assistance of a transaction advisor received a 20% higher price to earnings multiple and a 15% higher price to tangible book multiple.”

For most non-banks, price to tangible book multiples are not very relevant.  But price to earnings multiples are critical.  “What this study says,” comments Arcoleo, “is that transaction advisors like us add substantially more value – in the form of increased sale prices – than we absorb in success fees.”

So M&A advisors help business owners meet both objectives – a successful sale, and with the highest realizable net proceeds. 

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About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process ­for the past 20 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed thousands of business valuations and deal closings in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732.872.6777 or Info@NeumannAssociates.com