It’s usually a bad idea for the entrepreneur selling a company to tackle the M&A market without help from an experienced M&A Advisor. Retaining experience from an advisor who is in the business of selling companies helps ensure that business owners don’t approach the sale process naively or ill-prepared. There are always rough patches in the process and a savvy advisor knows how to navigate them to help secure a successful outcome for the seller. The seller will have to pay for these services but provided the seller has selected a qualified advisor, the ROI is usually very high. The complexity and multiplicity of tasks, the immense distraction for a business owner of running their business while simultaneously trying to sell it, and the downside of going through an M&A process and coming up empty-handed, are among the key reasons to hire an investment bank.
M&A Advisor Fee Structures
The advisor’s biggest payout comes in the form of a success fee if / when the deal closes. The fee is usually based on the final price of the transaction, subject to certain terms and modifications. This so-called “success fee” is set by the business owner and advisor when they commercialize their relationship. If the agreement calls for a percentage of the price, the advisor has an added incentive to maximize the value for the business owner.
In addition to a success fee, many M&A advisors require retainer fees–either an up-front payment or a monthly installment–while the M&A process is underway. Aside from helping pay out of pocket expenses, the retainer assures commitment by the seller. “It’s a predictable indicator of the seriousness of the owner to follow through on the sale and cuts out business owners that just want to see what their business is worth” says Jeremy Hovater of Sunset Business Advisors.
Preparing the Business for Sale
Considerable work goes into making the target market ready before the marketing package can go out. Clean financial information is critical. Many private company financials may be accurate but have “missing elements,” such as forward-looking business plans or “narratives” to back up the data. Beyond the financials, the advisor will want to assure that any physical facilities or locations look well-maintained. Ensuring that any key customers and suppliers are on board if the selling company changes hands is another vital task, as any buyer will want some degree of assurance that existing customers will remain in a change of control.
Going to Market
In the most visible portion of the process, the advisor “takes the owner’s company to market” and chooses the route that maximizes the chances of success for the business owner. Frequently, that involves some form of process by which the various buyers are contacted and asked to indicate interest at increasing degrees of commitment and seriousness. The advisor should be able to manage this process efficiently, including qualification of the buyers based on expertise, demonstration of seriousness, and capital available to close the deal. Depending on time requirements and special features of the target, a knowledgeable advisor may determine it is better to “show” the property to only one or two potential buyers; in other cases, the advisor may suggest a broader approach. No two processes are the same and therefore should not be treated the same.
Whether approaching a large buyer population or a few, the M&A advisor prepares a Confidential Business Review, often called a “marketing package” that includes significant financial, operations, and strategic information about the selling company.
Closing the Deal
Finally, a selling client should be confident the advisor can help with final negotiation of deal terms, including structures, escrows, seller financing, earn outs, and other key issues. If it takes contingent payments to get the deal done, the advisor should be able to guide those decisions. If non-price considerations such as non-compete agreements are critical, or if an employment or consulting contract for the selling owner is needed, the advisor should be able to help with these as well.