If you’re considering selling your company, you may wonder what makes a good Mergers and Acquisitions intermediary. This post is less about our company and more about how you should select and work with one on your deal.
- Focus Size: M&A advisors usually deal with firms between $1M and $50M in specific industries. Below the $1M, a business broker may be more appropriate. Additionally, in general businesses, or what is termed as Main Street Businesses, a broker may be best. For the Main Street Businesses (hair salons, restaurants, and some franchises), choosing a local business broker will be best as, from both a geographical perspective and an acquisition strategy, they will be better served with finding buyers through geographical listings or businesses for sale websites. Larger entities or those that require a strategic approach are best suited by the next tier of advisors, M&A intermediaries. These intermediaries can help prepare financial statements, position the company in a competitive bidding environment, and provide due diligence and negotiation consulting that will result in a successful exit. For over $50M or more complex transactions, the entity may need the top tier of service providers – Investment Bankers. These companies can facilitate public stock transactions, complex debt/equity deals and offer recapitalization or other services.
- Industry Coverage: for both M&A advisors and Investment Bankers, individual firms will have areas of expertise that translate into more alignment between industry knowledge & network and the areas of focus of the target firm. If you want to sell a landscaping company, find an advisor with knowledge of that market and relationships with those specific buyers. This will save you time in developing the best competitive bidding landscape, plus you won’t have to educate the advisor on how firms in your industry create profit and ultimately derive value.
- Team: be sure to select well-rounded firms in all the service areas you need to employ when undergoing a transaction. Specifically, look for firms that guide and assist with financial preparation, market the company effectively to an already developed network of buyers, and deliver results through the negotiation process. It would help if you had a potent combination of experience, expertise, ability, and persistence from your M&A team to deliver you an exit that hits all of your goals. From LOI to closing, an innumerable set of speed bumps and roadblocks can pop up. Selecting an experienced M&A advisor may be the difference between a successful exit and one that fails to deliver on your exit goals.
- Valuation: Most exits fail when negotiating and settling on the value of a business, which generally occurs during due diligence and between the LOI and closing. In the valuation genre, there are several methods or models used. More significant or public transactions may use the discounted cash flow model, which is a bit too complex to outline here (but feel free to contact us, and we will bore you with the details). In the lower middle market (under $40M), the method is typically a function of a multiple applied to an operating statistic of the firm’s performance over the trailing twelve months (TTM). This multiple can vary greatly depending on the industry, client concentration, firm growth, profitability, and many other factors. Typical multiples are anywhere between 4-12x of adjusted EBITDA. One key to this formula is the adjustments. See our other articles for an explanation of add-backs and one-time expenses that comprise this adjustment. Sellers typically have a valuation in mind that determines whether or not they will accept a deal. Buyers are equally pragmatic. On an unsurprising note, these two valuations are usually different. Three significant factors weigh heavily into whether the valuations from buyers rise to that of sellers: the ability for financial results have to survive scrutiny in the due diligence process (can they be proven out), a robust sell-side team (M&A advisor, CPA & Deal Attorneys), and a competitive bidding process (the bidding war). Absent of these factors, the likely outcome is more favorable to the buyer’s valuation than the seller’s.
- Style match: Select a firm that matches your communication style. If you want regular updates and a constant, hands-on team, select a smaller and more boutique firm. However, choose an Investment Bank if you wish to have more panache and a name brand to serve your exit. Remember that you may be better off as one of a handful of clients than one of the hundreds.
All exits are complex transactions, as it’s a marriage of two firms with juxtaposed desires and two or more businesses in constant flux. The understanding of this process, combined with years of experience and expertise, separates those M&A firms that deliver successful transactions from those that don’t. It could be the difference between hitting a desired valuation and winding up in a quagmire of frustration and disappointment.