Part 1 of a 9 part series we'll be publishing this month. Topic today is centered on "Building a Team."
Surrounding yourself with a team of trusted experts and advisors that have experience completing transactions in your industry is key. The first step is engaging an M&A advisor or investment banker to guide you through the process. We recommend finding an advisor you trust as early as possible. Engaging a professional 2-3 years before you need, or even want, to sell your business can help ensure that you ultimately get the valuation you expect and deserve.
How M&A Advisors Increase Value
A recent study found that “private sellers receive significantly higher acquisition premiums when they retain M&A advisors.” The higher acquisition price derives from an M&A advisor’s ability to run smoother processes with better buyer lists. Financial intermediaries have “greater economies of specialization and information acquisition, and have lower search costs than their clients.” A smooth process means that the M&A advisor is particularly adept at keeping multiple, relevant bidders engaged simultaneously. This concurrent interest from several interested parties is critical to obtaining the best sale price.
A good M&A advisor can also help a business owner identify the best process and timeline for exiting the business. Since many closely-held businesses often experience intense family or shareholder dynamics, which may complicate the transaction, having a full understanding of the available options is essential. For example, if you want to sell the business to family or friends, a management buyout (MBO) or an Employee Stock Ownership Plan (ESOP) may be most appropriate. For transactions involving highly complex family or shareholder dynamics, your advisor can also serve as objective, third-party counsel that helps your business make decisions that maximizes a successful outcome for all stakeholders.
Often, advisory firms will make suggestions for small strategic or management changes to help a company increase its value in the time before a sale. These are not massive upheavals, but rather small tweaks to help make a business more attractive to potential buyers in a reasonably short period of time (e.g., 6-12 months). Working with a knowledgeable banker or informed board members that have relevant industry experience and business strategy context can be very valuable.
Once you’ve signed an engagement letter with an advisor, it’s crucial to spend the time to properly aggregate, interpret, and present your company’s financial and business history and future projections. Business owners typically prepare their financial statements for tax purposes, not for business sale purposes. Using tax statements for business sale presentation is a major mistake, as it usually obscures the earnings capability of a business. The “Quality of Earnings” report is a key aspect of the due diligence process of a sale, during which investors will review your company’s financial performance in detail. Making sure that the appropriate financial adjustments are made is an important step and takes time and analysis by your accountant and M&A team.
How to Choose an M&A Advisor
Like most M&A activities, there is no perfect formula for choosing an investment banker or M&A advisor. As CEO, you know you need an intermediary, but have no guide for navigating the courting process. The following scorecard can serve as a guide to help CEOs make sense of cultural fit and indicators for future success before signing an agreement with an intermediary group.
Use this scorecard as an internal tool to benchmark one intermediary group against another. After meeting with an investment bank, you can score the bank’s performance in each stage leading up to exclusive engagement. This exercise, if nothing else, can help you discover your preferences and place emphasis on the categories that are most impactful to your business outcomes.
The score for every category should total at least 12, otherwise there is likely not a long-term fit between your company and the bank. As CEO, this scorecard can help you feel confident about picking up the pen and signing an investment banking engagement agreement.
Here are some questions to consider as you score each investment bank in the categories on the scorecard.
Industry Expertise ɚ How well does this group understand my business and the things that impact it on a daily basis? ɚ Have they ever successfully navigated a transaction in this industry in the past?
Advisory Style ɚ How appropriate is their engagement structure for my needs? ɚ How fair is their fee structure? ɚ How much time should I anticipate spending with this group per week?
Size / Turnover ɚ Does the team have high turnover or limited resources that might affect the success of the transaction?
Current and Historic Transactions ɚ What is the firm’s bandwidth to dedicate time/resources to my company, versus another client? ɚ How many transactions have they intermediated in the past and did those follow the proposed timeline?
Level of Seniority ɚ Does the firm have a director-level member of the team to dedicate to my transaction? ɚ Will that person be the main point of contact moving forward?
Personal Experience ɚ Is the investment banker sitting across from me personally responsible for successful transactions, or speaking on behalf of the firm? ɚ How well does he or she provide anecdotal information about experience?
Number of Attendees ɚ How many people did they take out of the office to meet with me? Competition / Market Leader? ɚ Has this firm ever worked with a company I compete with? ɚ How well-regarded are they among the other investment banks in their geography or industry
Storytelling / Specificity ɚ How well does the firm understand my company’s story and both past and future plans? ɚ How confident do I feel that the firm is committed to our specific strategic initiatives?
Individualization ɚ Did the bank specialize their outreach to me or address the executive team and me as a group? Communication of Value-Add ɚ How well did the firm or banker communicate the services and value that would be delivered as a result of our exclusive engagement? “How well does the firm understand my company’s story?” :
Timeliness of Communications ɚ How long after the meeting were next steps and expectations delivered back to me?
Tone ɚ Did our two groups achieve peer-voice? ɚ Does their tone match mine during uncomfortable scenarios or questions? Question Quality ɚ How strong were the questions they asked me?
Response Quality ɚ How well did they answer the questions I asked?
Meeting Duration ɚ Was the firm respectful of my time and bandwidth? ɚ Were there inefficiencies before or during the meeting that would potentially be an annoyance or deterrence in the future?
Building Your M&A Deal Team
Your advisor or investment banker is the linchpin of your deal team. But you’ll also need a team of specialists throughout the transaction process. In addition to your advisor, most deal teams consist at minimum of company executives, your board of directors if applicable, attorney, accountant, and wealth manager. These professionals are critical in gathering the data required to place a proper value on your business, and in organizing financial statements requested by the buyer during the due diligence phase of negotiations.
In Part 2, we'll share thoughts and best practices on defining your exit strategies and potential options.
Please see our intro brief on M. Allen & DelMorgan & Co.