I am probably the only M&A advisor out there who will be honest enough to tell you that you DO NOT need an M&A advisor/broker for every transaction. That said, I think there are transactions that you should NEVER do on your own – more on that later.
You may have read in earlier posts that I sold two of my own companies without an advisor, and sold my last one with an advisor. I will use these three sales to bring context to this post as I answer your question, “Do I need an M&A advisor?”
When To NOT Use an M&A Advisor
The first company sale I transacted was to my partner who owned the other 50% of the company. We had a great working relationship, but I wanted out of the company and could not think of another person who would want to buy out my shares. Plus, our operating agreement required me to give my partner the first right of refusal. Bringing an advisor in on that deal would have felt a little tacky and yucky (technical term), especially if you have a great working relationship. And frankly, it probably would not have provided any additional value. We both understood the business and came to a number together that felt good for both of us.
My second company sale was to a “very friendly” competitor. Now, this could have gone either way for using an advisor or not, because they were significantly larger than my company and had done a number of acquisitions prior to purchasing my company. So, they were a heck of a lot savvier than I was. But I had one under my belt, so at least I understood the process and the agreements.
And although we were competitors, we shared some mutual clients through my third company; therefore, they were a “friendly” competitor. Plus, both teams had worked together in the past, so, again, bringing in an advisor probably would have mucked up the deal. But I will be honest and say I left plenty of money on the table because I was a novice at selling my company and (small plug coming) I didn’t have a course like Ready…Set…SELL to learn all the in’s and out’s of an M&A transaction.
Another example of when you might not need an advisor is if you are selling to a competitor who is small and really just wants to expand their client base or geography by buying your company; you are both equals and plan on working together to grow the company into something larger. Again, the transaction needs to be small (revenue under $3M) and you both will remain in place, so you want to maintain a positive working relationship going forward. Therefore, you really need to hash out the deal points together as part of building a sustainable working relationship and company.
Again, this is a scenario where you might not want to use an advisor. Yes, I know every other advisor that reads this will likely disagree, but in some cases, the cost (success fees) outweighs the benefits.
When to Use an M&A Advisor
Now, let’s discuss when I would NEVER sell without an advisor. And that is when you sell to a company backed by a PE firm or directly to a PE firm. Here is why:
- PE (private equity) firms are very savvy with their investments. After all, it’s what they do, and they need to make the highest profit for their investors. Their entire process is about the numbers and purchasing something for as low as they can get it to eventually sell it for as much as they can.
- They aren’t emotional about a deal. The two situations I described above involved the emotions of not only the seller, but also the buyer. Whenever emotions are involved, people will pay more…for a variety of reasons…but mostly ego. 😊
- PE firms know the tricks to drive down the price. You may walk into 90 days of due diligence thinking you are going to sell for one price, and then either the Quality of Earnings Report comes back “unexpectedly not in your favor” or they decide during the last month not to accept all of your normalizations. At that point, you have already put in 60 tiring days of relentless due diligence and you just want to get the deal done, so you end up accepting a lower price.
I have seen this time and time again: if you don’t have a good M&A advisor by your side to help you navigate those conversations (or, better yet, head them off at the pass early on), you will probably accept a lower price. On this note, sometimes you think you are initially selling to another competitor or strategic buyer, only to find out after you signed the LOI that they are backed by a PE firm. So, what initially appeared to be an easy transaction with a nice gentle buyer turns into something a bit more “involved.”
The last company I sold, I did use an advisor because I knew I was going to attract PE to my deal and I wanted to make sure I didn’t find myself in that situation. And yes, they did try to do a few things with my numbers, and I would never have gotten that deal done on my own. It was just too adversarial! But, skillfully, my advisor and I had some gems in our back pocket that we pulled out at the end to actually increase the price.
Look, I don’t want to leave you with the impression that dealing with a PE firm is always a challenging sale. Many are actually a pleasure to work with. But they are here to make money for their investors first and foremost, so just go into it with that mentality and protect yourself with a good advisor.
A Sad but True Story
While this post is about using or not using an advisor, I still wanted to share with you a true story of when using the wrong advisor can lead to no transaction at all. I will call it the Elephant Story…
In my guide called 100 Tips for a Successful Sale, I give a tip about avoiding the elephants and the sharks when picking an advisor (Tip #74). Elephants are companies that specialize in much larger transactions than your company sale. Elephants take on the business if there is a lack of deals in their pipeline. You want to avoid the elephants because they overcharge and underservice, and you will be trampled in their rush out the door! I will leave it to you to read about the sharks later.
Ok, now back to the story. I ended up taking over a transaction that was started by an elephant (investment banker) who I think realized, after taking on this particular client, that he was probably not going to get paid enough on the transaction. So, he quickly lost interest after contacting a few prospective buyers.
Here comes the sad part…this elephant took so much time finding buyers for the seller that, in the meantime, the seller lost his largest client because they moved out of the country. Absolutely no fault of the seller, but it did significantly drop his top-line revenue and bottom-line net income by about 15%. Yes, it was a large client! Unfortunately, every buyer I brought to the table noticed, after some due diligence, the drop in revenue starting two months back. This then created a concern regarding the ability to make up the revenue and how long it might take to earn that back. Not a good thing!
In this case, one after another, every prospective buyer passed or came back with a sub-par offer.
The point here is: if he had picked the right advisor from the start, the deal could have already been finalized before they lost that large client, and the buyer would have had to deal with that loss. Now, my seller needs to hustle hard for probably 6 more months, if not longer, to make up for that lost revenue.
So, you can see that just picking the wrong advisor can have some pretty hefty consequences. If you are interested in learning more about selecting advisors or want my handy checklist on how to select not only an M&A advisor, but also a transaction attorney, check out The M&A Academy!