I am ready to sell my business. I have a buyer lined up—a peer in our industry whom I’ve known and trusted for years. At this point, bringing in a mergers & acquisitions advisory firm would accomplish little besides cutting into profits from my sale price, right?
History, and research studies, suggest this is not the case.
In 2016, Fairfield University assistant professor of finance Michael B. McDonald published a study1 in which 85 business owners who sold their businesses for a price between $10 and $250 million with the help of an advisory firm between 2011 and 2016 were surveyed. Of those sellers, 84% reported a final sale price that was equal to or higher than initial sale price estimates received from their advisors.
Mertz Taggart has reported similar results working with its clients. Prospective sellers approach our firm under the belief that they are already well on their way to a deal, when really, many are en route to a sale that leaves millions on the table. For example, in 2020 we were approached by a business owner who was prepared to sell. The seller presented us with the offer they had received from a prospective, strategic buyer: a sale price of $5 million in cash at close, plus a $1 million earnout contingent payment that wasn’t attainable in our view. The seller asked: Was this a fair offer? In our estimation, it was not, and so we went to work on negotiating a better deal. The result? The same buyer eventually agreed to a sale price of $7.5 million cash at close, plus a $500,000 earnout contingent payment that was more attainable. Our leverage? The threat of going to market, creating a competitive auction process. In a similar deal completed last year, a buyer initially offered $12 million, but ultimately agreed to a price of nearly $20 million.
Such deals don’t materialize out of thin air, of course. When considering the sale of your business, enlisting the services of an M&A advisory firm offers several benefits:
Perception and leverage.
It is widely understood within the buying community that the presence of a professional intermediary, i.e., an M&A advisory firm that represents the seller, will ensure that the seller will accept nothing less than the best terms for their business. Mertz Taggart works hand in hand with clients to identify their objectives in a sale and presents a thorough list of qualified potential buyers and/or investors. Having multiple qualified buyers creates a competitive, seller-friendly market. In many cases, the mere presence of an M&A advisory firm can have the same effect, as competition becomes the expectation for buyers when they know the seller is being represented by an advisory firm. What’s more, buyers who know they face competition for a potential acquisition target are less likely to drag out negotiations and due diligence and run the risk of losing a potential deal. Increased competition and multiple offers create additional leverage for a seller.
Put your best foot forward.
When working with our clients, we organize and prepare the seller’s financial data and create a Confidential Information Memorandum (CIM) that tells the client’s story, details its financial data, and demonstrates its unique value proposition. The CIM is shared only with buyers who have been vetted, and who have signed a Confidentiality Agreement. Potential suitors may include strategic buyers who are looking to integrate new companies into their existing operations or expand their footprint, or financial buyers, such as private equity firms looking for a return on invested capital.
Navigating the process.
Selling a business is a complex process that must clear several hurdles along the way. Information must be exchanged between buyer and seller, buyers often want to conduct (confidential) site visits, and other exercises in due diligence must be completed. Failing to successfully complete these steps can often make promising deals fall apart. When sellers choose to go it alone, they can end up spending significant time on tasks other than those that generate revenue and drive up the value of their organization. Hiring an advisory firm allows business owners to maintain their focus on running their organization and trust that the complicated process that must be traversed to close a deal are handled by those who specialize in doing so. It’s why respondents in the McDonald study ranked managing the sales process as the most valuable service offered by advisory firms.
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Ultimately, enlisting the services of an M&A advisory firm puts the seller firmly in control of the sale. A good advisor maximizes a seller’s chances of getting the best return on their investment by accentuating a selling organization’s best traits, identifying qualified buyers, driving competition, and professionally managing the sales process to completion. Sellers can focus their energies on running their business while knowing they are putting their organization in the best possible position for a deal.
1 McDonald, Michael B. IV. Fairfield University, 2016. The Value of Middle Market Investment Bankers.