A recently released white paper from Fairfield University in the United States is the first comprehensive and very interesting study quantifying the value of M&A advisory services during the sale process, as determined by a survey of business leaders who have sold their companies in the past five years.
This study answers two key questions:
- Do business leaders feel that their M&A advisors added value in the process?
- Which of the services provided by M&A advisors do business leaders value most?
Prior to this study, there were only anecdotal responses of the value of M&A advisors, which were typically provided by the investment banks themselves when they entered into new business. Until now, there were no hard numbers or supporting data to validate the value created by middle market M&A advisors.
Methodology
To be eligible for this survey, respondents were subject to the following set of criteria:
- Privately owned and operated business
- Worth between $10 million and $250 million
- Majority of shares sold
- Company represented by reputable M&A advisor
Questions to business leaders
Owners were asked to rank each of the following services provided by their M&A advisor:
- Find the buyer
- Negotiate the agreement
- Ensure the sales process
- Improve the credibility of the seller
- Support of the company manager
- Structuring the transaction
- Continue to manage the business
For clarity, below are descriptions of each service:
Find the buyer
M&A advisors complement the owners’ knowledge of their markets and potential partners by using their professional contacts and networks, their investor databases and their expertise to identify and connect with interested buyers.
Negotiate the agreement
Mergers and acquisitions advisors typically take the lead in negotiating the terms – not only the purchase price but also the terms, timing, process and other major elements of the transaction.
Ensure the sales process
M&A advisors are often “coaches” for the entire transaction process. They are responsible for keeping the transaction process competitive, coordinating between the various aspects of the transaction, managing a large team of other advisors, and ensuring that the transaction proceeds to completion.
Improve the credibility of the seller
Engaging a quality M&A advisor shows all parties involved that there is a genuine commitment to preparing for the transaction and that there is real professional thought, thus increasing the likelihood of a successful closing.
Preparing the company for sale
Transferors are rarely prepared for the scrutiny they will face from experienced buyers and their solicitation of professional transaction advice. M&A consulting firms can help business owners with this preparation, which can range from preparing detailed financial models and projections, to working with management to prepare them for an intense transaction process, to in-depth customer analysis.
Support of the company manager
The vast majority of business owners have never completed a transaction. Quality M&A advisors have handled hundreds of transactions and can pass on the benefits of that experience to the owner.
Structuring the transaction
Transactions may involve various forms of consideration, such as cash, equity, seller arguments, revenue outflows and other forms of contingent consideration. M&A advisors can structure each transaction to specifically address the needs and desires of the sellers and buyers, providing alternative solutions for potentially conflicting transaction objectives.
Continue to manage the business
The transaction process is an intensive process that sellers must endure, especially as they try to manage the day-to-day operations of their business. By taking on most of the day-to-day work, M&A advisory firms allow the owners to focus on building their business rather than managing the transaction process, which typically takes six to nine months.
Key findings
1. Which of the services provided do business owners value the most?
Successful transferors responded that all services provided by M&A advisors were highly valued, as they all scored above 3.5 on a scale of 1 to 5.
Managing the complex M&A process and strategy was most valued by owners. By maintaining a competitive process with multiple bidders, M&A advisors can maximize shareholder value through a disciplined process. Without a disciplined and competitive process, sellers may question whether the best possible offer was obtained.
Negotiating and structuring the transaction was ranked second on the list of high-value services. By allowing the investment banker to lead the negotiations, sellers can maintain a positive working relationship with their new owner. If sellers handle these difficult negotiations themselves, the relationship between buyer and seller can often get off on the wrong foot.
Mergers and acquisitions consultants can shield sellers from these difficult negotiations to help them achieve the best possible outcome that meets their clients’ transaction objectives.
Similarly, the creativity and experience of M&A advisors in structuring a transaction can add value and achieve the different objectives of the buyer and seller. With the right structure, acquirers can limit their potential risks while sellers can often benefit from preferential tax treatment or obtain a significant capital gain beyond the consideration paid at closing. Negotiating and structuring a transaction solution that balances the objectives of the buyer and seller can also increase the likelihood of a successful closing.
The first two questions most business leaders ask when talking to potential M&A advisors are:
- Can you find me a buyer?
- How many transactions have you completed in the XYZ industry?
Surprisingly, despite its perceived importance to many transferors at the outset, “identifying or finding the buyer” was ultimately the least valued by successful transferors.
M&A advisors can tap not only into their professional contacts and networks, but also a wide range of industry research, sophisticated databases and Internet searches to identify other potential buyers. The marginal value of identifying a potential buyer often pales in comparison to other services provided by M&A advisors.
2. Do business leaders think their M&A advisors add value?
Interestingly, 100% of respondents said their M&A advisor added value to the transaction process and contributed to a successful closing.
According to these sellers, M&A advisors add moderate to significant value by “leveling the playing field” between the professional buyers (and their world-class advisors) and the junior seller.
These results will come as no surprise to experienced deal professionals, but may be to private company owners. Large corporations and private equity firms almost always hire M&A advisors when selling their portfolio companies because of the value they bring.
In summary
M&A advisors are able to add value in a number of services related to an M&A transaction, including finding a buyer, ensuring the sale process, enhancing the credibility of the seller, supporting the owner, structuring the transaction and allowing the business to continue. These added values are subject to a fairly structured and competitive process, otherwise, sellers may have serious doubts about the success of the transaction. The sellers are also grateful for the assistance in negotiating and structuring the transaction provided by the M&A advisors.
The survey states that all of the M&A advisors they used were able to add value to the transaction process and that without them, the deals might have failed
