PART 2 - What to consider when determining the value of an M&A Advisor. Is it worth the fee?

Every skill we master involves a learning curve - from driving a car, or attempting athletic endeavors, to completing business transactions with myriad accounting, strategic and legal complexities. Most people would agree that practice improves our performance. Taking this into account, when you think about selling your business do you really want to handle such an important financial transaction without the experience of handling other similar transactions?

In my previous post, I discussed two primary issues integral to every M&A transaction - Terms and Valuation. But what are some of the other operational factors to keep in mind when arranging to sell your business? Here are a few you should be sure to think about...and why retaining an M&A Advisor can increase the value you receive and help you achieve your goals.

1)  Keep Distractions minimized as you continue to operate your business. Most business owners are extremely skilled and dedicated when it comes to running their business, but they often lack the experience necessary to sell a company or merge with another company. These transactions are more nuanced than many business owners are often prepared for. When owners decide to sell a business themselves, they should weigh the opportunity costs involved. Selling a business is a complex task, distracting owners from the core day to day operations vital to maintaining and growing the value of the business. This lack of concentration on the core business can decrease the value of the operation and possibly affect the transaction price down the road. The best way to keep distractions minimized is to find an experienced, trustworthy advisor who can run the process of marketing your company and allow you to focus on keeping your business running smoothly.

2)  Confidentiality. An investment banker can solicit initial interest without disclosing the identity of the seller. By utilizing MidCap Advisors to confidentially handle your transaction, you avoid problems with employees, suppliers, competitors, customers, and financial partners.

3)  Non-emotional buffer in negotiations. An experienced third party is generally more objective and effective than the seller in negotiating a transaction. Certainly, the investment banker will not know as much about the company as the seller, but unlike the owner, a third party can solicit interest without causing the owner to appear overeager. The investment banker is also better suited to engaging in discussions with multiple buyers, which can create momentum and ensure a fair price. Often the negotiating process is long, difficult, and requires hard bargaining. The seller does not want to expend valuable negotiating leverage early in this process. The investment banker should handle initial steps of narrowing the field of potential suitors, conserving seller's negotiating capacity to the end of the process when it is needed most with a select few participants.

4)  Strategic and Financial Contacts. Identifying potential acquirers is typically not the strong suit of a CEO. An experienced investment banker will not only be aware of prospective strategic buyers, but also have relationships with private equity groups and referral sources that can broaden the field of prospective acquirers. Knowledge of the market is developed over years of experience.

5)  Financial structuring of offer. Many M&A transactions are partially financed with seller earn-outs. What metrics would you use to determine earn-out payments? Would it be more advantageous to peg your payout to revenue or net income or some hybrid of the two? How would you address related party sales? What about allocation of corporate costs?

Not all M&A Advisors are equal. You should have a comfortable working relationship with your banker since you will be working together closely throughout the process and sharing confidential information. Just as important, you must have confidence in your advisor's ability to professionally represent you and optimize the outcome of this uniquely important transaction.