When it’s time for business owners to sell their business, one of the first questions is: do I need to hire an advisor? Many business owners believe they can sell their business on their own. They liken it to selling a house. The reality is there is a tremendous amount of scrutiny, work, and time that goes into selling a business, and the best outcomes are often achieved through a carefully planned strategy. Below we will unpack some of the common Misconceptions vs. Realities regarding the hiring of an M&A advisor. First, however, we must make a key distinction that when we refer to an M&A advisor, we are describing an investment banker and not an M&A broker.
What do we mean by that? An investment banker is going to be a high-touch service from start to finish of the M&A process. An investment banker will get “into the weeds” to help evaluate the company’s financials and prepare for a sale. The overall process is much more strategic in nature in terms of determining the potential buyers to approach. This direct outreach also helps maintain confidentiality on which buyers will get a chance to review the deal. Lastly, good investment bankers are heavily involved throughout the process, especially in due diligence in order to get the deal across the finish line.
On the other hand, brokers are typically more high-level when it comes to evaluating financials, and businesses are instead posted on their website in a much more passive process hoping a buyer comes along. Some brokers will also approach a buyer list by blasting the opportunity out to hundreds of buyers with the hope one bites. This shotgun approach can jeopardize confidentiality. Additionally, brokers are often selling businesses to individual buyers on the smaller end of the market where these posting and shotgun strategies lend to. Lastly, brokers typically aren’t as involved during the due diligence process. There is more time we could spend on this topic, but you’ll see below why these key differences require defining as we outline the benefits an investment banker brings to the M&A process.
Misconception #1: Owner already knows who the best buyer will be.
Business owners often think they know who the best potential buyers will be. The thought is typically that the buyer will be either their strongest couple of competitors, or a few private equity firms that have called on them over the years and have shown interest.
REALITY: While those potential buyers are certainly strong candidates, our clients that go through a full process are usually pleasantly surprised by who the ultimate buyer is. Their closest competitors may not be able to pay for what is a market or premium valuation, or even if they are, may not be in the market at the time as a buyer. On the other hand, private equity companies are calling on business owners all the time. They are doing so for a reason: it is much more advantageous for them to acquire a company “off-market” where they are not having to compete against other buyers. By nature, they can provide an unsolicited offer that may be below what they’re ultimately willing to pay or even worse, well below market.
Competition of buyers is one of the most important reasons to hire an investment banker to run a strategic process. Competition drives up the price and quality of the offers for a business. Buyers have to put their best foot forward not only on price but also other key terms and aspects of the deal. Investment bankers conduct immense research to determine a buyer list that has the best 100 or so potential buyers to go out to on the process.
Misconception #2: Business Owner thinks it can’t be that difficult of a process.
REALITY: Selling a company can be a complex and time-consuming process. What makes it so difficult? One key aspect is the ways a seller can be exploited for a less-favorable deal. Many business owners are going through a sale process for the first time. What they don’t know about deal aspects that are “in-market” can be tremendously detrimental to getting a fair deal. Buyers that are constantly in-market know how to take advantage of deal dynamics and structure that goes beyond just the headline price. While an owner may think they are getting a fair price for the letter of intent (“LOI”) that is signed, there are numerous aspects that can be tilted towards a buyer’s favor. A buyer may offer a fair multiple of EBITDA, yet have structure that creates deferred or non-guaranteed payments (earnout). There is a negotiation of structure when it comes to whether the deal will be a stock transaction or asset transaction. There are extreme benefits to having an investment banker who is constantly in-market, knows what is fair, and what levers of the deal can be pulled throughout negotiations.
Despite the fact that the business sale process is more difficult than a residential real estate transaction, ~90% of U.S. homeowners use a real estate agent to sell their home. Why wouldn’t business owners equally use an M&A advisor for an even harder process? Not to mention a business is typically a much larger portion of a business owner’s personal wealth. And because it is a large, complex asset, there is much more due diligence to be done by a buyer on every aspect of the business prior to closing. The diligence process is our next topic.
Misconception #3: Underestimation of the Level of Due Diligence and Associated Information Requests.
After every closed deal, we ask our clients what was the biggest surprise of the process. Without fail, the #1 answer is how many questions and information requests would be asked by the buyer and the various buy-side advisors. Past clients say they thought there would be a few financial statement requests, some tax returns, and high-level customer information.
REALITY: Due diligence information requests and questions are a tenuous but expected process. The diligence process seems to only be getting more stringent as time goes on. The multiple diligence streams involved cover accounting, legal, tax, insurance, employee matters, environmental, etc. No stone is left unturned as a buyer looks to confirm and understand every aspect of the business they are buying and validate their investment.
The time from signing an LOI to officially closing a deal can take 2-3 months at minimum, oftentimes much longer without an experienced investment banker to help shepherd the process. Business owners that go at it alone are expecting to handle all of these information requests and continue to run their business without performance slipping during this period. If performance does slip, it provides yet another opening for a buyer to negotiate in their favor. An investment banker can handle many of the due diligence requests to free up the business owner to do what they do best: run their business.
Finally, an investment banker keeps the deal moving forward to shorten the diligence period as much as possible. They can push back on a buyer that is asking too much. An owner might think that because they have an unsolicited offer on the table it will be quicker to close with that buyer rather than higher an advisor. Going at the process alone can lead to a much longer diligence time that in reality it ends up taking a lot longer than if an advisor had been hired in the first place. The more a deal progresses forward, the higher the likelihood of closing and the lower the likelihood of adverse deal changes for the owner.
Misconception #4: Owner will save money by not hiring an advisor.
Owners view paying an advisor as a deal expense, and if they have all the misconceptions above that the expense isn’t worth it, then the thought is: why hire one?
REALITY: Investment banks typically get paid the majority of their fee via a small % of the overall deal value at close. Viewing this as only an expense leads owners to shy away. Instead, the focus should be on the incremental value that can be driven and delivered from hiring an investment banker to run a process that often ends up in a much more favorable outcome. We noted above the competition and improved deal terms that come from a process and negotiation by hiring an advisor. The incremental deal value should more than pay for the fee. Let’s take a simple example: a business with $5 million EBITDA gets approached with an unsolicited offer that values their business for 5x ($25 million total offer). Rather than accept that offer, the owner hires an advisor to run a process that seeks out and brings the best possible buyers to the table for this business, and the ultimate winning offer is 7x. The incremental $10 million more than pays for the advisor fee. The opposite of this misconception is actually often the case: an owner can lose out on money by not hiring an investment banker.
Conclusion
We hope this helps outline some of the reasons why an owner should hire an investment bank to guide them through a sale process. At the end of the day, having an objective advisor who is constantly in the business of executing deals at a business owner’s side proves to be an invaluable resource for owners navigating this important and complicated process.
