Do I need to hire a Merger & Acquisition Advisor to sell my business? Do they deliver value? Is it worth it?
Throughout my career I have heard these questions in one form or the other from owners who are considering selling their business. My short answer is that “yes, a quality Merger & Acquisition Advisor will certainly find and negotiate a better deal than the private seller can do for himself”. My personal experience testifies to this fact.
But don’t take my word for it – empirical research proves it
Instead of taking my word for it, an academic research paper, Does Hiring M&A Advisers Matter for Private Sellers? published in late 2018 (Agrawal et. al.) explains why a M&A Advisor drives a better deal and by how much.
This article summarizes and explains the key findings. But to get to the bottom line, the authors state, “we find that private sellers that hire advisers receive significantly higher acquisition premiums.” They go on to say, “We provide new evidence that financial advisers improve M&A outcomes for sellers that are more likely to lack deal-making experience and negotiating skills and hence can benefit from M&A adviser expertise.”
To give context, the researchers reviewed 3,281 acquisitions of private companies during 1993-2010. About 47% used a M&A Advisor (53% did not). For multiple reasons, those that did not hire a M&A Advisor received much lower valuations for their business. Therefore, those that did hire a M&A Advisor received much higher valuations.
How much more value do sellers achieve by hiring M&A Advisors?
The empirical evidence indicates that engaging a M&A Advisor produces significantly more value to the business seller. The authors write, “We find that private sellers receive significantly higher acquisition premiums when they retain advisers.” They estimate the magnitude of this effect ranging from about 6% to about 25%.
Here is a nuts-and-bolts example of what this means to a private business seller
Assume a buyer approaches Business Owner A about buying his company for $25 million. Business Owner A is enthusiastic about the opportunity to exit the business and “cash-out” a tidy sum. It validates his life’s work. It also will give him the chance to pursue other things he has wanted to pursue, including retirement, and lift the daily burdens of operating the business. Sounds great, but….
Compare that to the Business Owner B, who hires a M&A Advisor that runs a typical sale process and receives multiple bids from buyers. Some buyers may be “fishing”, but others are serious and are willing to pay a premium. Ultimately, the top bidder offers $30 million, a $5 million premium (20%) to what Business Owner A received.
Who is better off? Business Owner B, of course, by $5 million.
Personally, I have seen this scenario play out time and again. This is not unique.
Why does engaging a M&A Advisor create so much more value than not hiring one?
The paper cites several benefits a M&A Advisor offers to a seller of a private business. The M&A Advisor…
- Creates competition among bidders. A M&A Advisor creates competition among multiple bidders. Why is having multiple buyers so important? Having multiple serious bidders strengthens the seller’s negotiating position. Having more qualified bidders competing for the business drives up price. Plus, it puts the seller in a strong negotiating position to obtain very good terms along with a high price.
- Aids in identifying buyers. The M&A Advisor has access to a much larger network of qualified buyers than the business owner has. The M&A Advisor can open a large pool of potential buyers that a business owner is both unaware of and cannot reach. Plus, M&A advisors have extensive proprietary databases that can be used to identify and research potential buyers, both strategic and private equity. A private business seller by himself cannot do this.
- Manages the sale process. A typical business sale takes 6-12 months and several thousand man-hours. A M&A Advisor manages the entire deal process and acts as quarterback to drive the deal forward. This includes everything from performing due diligence, identifying and researching buyers, soliciting and communicating with multiple buyers, building a data room and juggling information flow and negotiating and executing the deal. If a business owner embarks on a company sale by himself, he risks becoming distracted from running his business, which then leads to performance declines. One of the worst things that can happen during a sale process is to suffer a decline in business performance.
- Influences the attitudes and assumptions of bidders. Engaging a M&A Advisor provides credibility to the seller and levels the playing field with professional buyers. For example, having a M&A Advisor shows that a seller is serious about consummating a deal. Buyers review hundreds of deals annually and they only want to spend time with those sellers that are serious. Also, the M&A Advisor gives the impression that there are multiple competing bidders, so each buyer must offer their “best” deal.
- Provides valuation analysis needed by the seller to evaluate the reasonableness and credibility of a buyer’s offer. An experienced M&A Advisor provides an objective valuation of the business based on reasonable assumptions. He can also highlight benefits to buyers, share pertinent information to support value and evaluate any synergies that a buyer might realize. These actions ensure that the buyer sees and understands the true attributes and value of the business. This prevents the buyer from under-valuing the business.
- Strengthens negotiating position and paces the negotiations and deal momentum. A M&A Advisor uses his soft skills (communication, reputation, rapport, knowledge of the M&A process and transactional experience) to effectively negotiate a favorable outcome on behalf of his client. The M&A Advisor can act as a buffer between buyer and seller standing firm on certain points and playing “bad” cop when necessary. Plus, a M&A Advisor paces the transaction so that all bidders move through the process steps at the same time. This ensures momentum continues and that the deal continues to move forward to closing.
What is the risk to a seller who does not hire a M&A Advisor?
The paper points out several risks business sellers face by NOT engaging a M&A Advisor:
- Private firms are generally not familiar with the M&A process and have limited experience negotiating M&A deals. In contrast, buyers are often routine acquirors and have access to seasoned and professional staff and outside advisors.
- The scarcity of publicly available information on a private company means potential buyers are at a disadvantage when evaluating a private seller’s business and face informational risks. Higher perceived risks lead to a lower valuation.
- A private company has limited visibility to potential buyers (less attention from analysts, news media, investors, etc.), Therefore, less visible firms are likely to attract few competing bids, limiting their bargaining power in deal negotiations. Specifically, a seller who negotiates with a single buyer only has one option – take a deal or leave it. And if the buyer thinks it is the only bidder and without competition, there is no reason for it to make its best offer.
What’s the Bottom Line?
Based on this research, empirical evidence shows that M&A Advisors significantly improve outcomes for private sellers. M&A Advisors can find and negotiate better deals from private sellers than the sellers can obtain by themselves.
M&A Advisors can add millions to the value of the deal. Plus, they offer other non-monetary benefits. Since selling a business is such an important business decision, why take the risk of not engaging a M&A Advisor?
Therefore, to answer the initial questions… M&A Advisors deliver significant value to private sellers and are worth engaging.
-- By Jason Wilcox, Founder of Wilcox Investment Bankers