Many business owners ponder selling their business without engaging an advisory firm or investment bank. Even when approached by a “friendly” suitor, going it alone can leave significant value on the table along with increasing the risk of successfully closing the deal. Steve Zacharias, managing partner of Transact Capital, identifies the key functions and benefits of using an investment bank or M&A Advisory firm for selling your business.
Many business owners frequently receive letters, mail and phone calls from brokers soliciting them to sell their business. Usually the catch phrase is “I have a buyer interested in your business…”. Most successful business owners have learned that those letters belong in the circular file under their desk.
But successful businesses also attract direct suitors (competitors, industry peers, strategic acquirers) who are legitimately interested in an acquisition. They ponder how to handle the inquiry, whether to try to do it alone, maybe ask their tax accountant, lawyer, or other advisor if they should pursue the overture on their own vs paying fees to engage an investment banker or M&A firm. History proves that many of these go-it-alone approaches end up as a waste of time and loss of business value, studies have shown quite the opposite is true when the company hires an independent advisory firm for this purpose.
One former business owner noted, “Unless you have substantial expertise, a broad buyer network, and a lot of free time, partner with an investment bank. You may be able to get [the deal] done yourself or with a friendly advisor, but you’ll be leaving millions of dollars on the table as well as closing a higher-risk transaction (when it comes to representations, warranties, and indemnifications.)”
In a recent study1, eight benefits were identified and heavily endorsed for hiring an investment bank or M&A Advisor, all leading to a higher price or less risk. Below are eight key “value-adds” of engaging an investment bank:
- Finding Buyers
Investment bankers supplement the owners’ knowledge of their markets and potential partners by tapping into their professional contacts and networks, investor databases, and expertise to identify and connect with interested buyers.
- Negotiating the deal
Investment bankers typically take the lead in negotiating the terms — not only purchase price but also the terms and conditions, timing, process and other major considerations of the transaction.
- Managing the sales process
Investment bankers are often quarterbacks for the entire transaction process. They are the ones who are responsible for keeping the transaction process competitive, coordinating between all of the different aspects of the transaction, managing a broad team of other advisors, and keeping the transaction moving to a closing.
- Adding credibility to the seller
Engaging a quality investment bank illustrates to all of the parties involved that there is a genuine commitment to explore the transaction and that there is professional representation, thus increasing the likelihood of a successful closing.
- Preparing the company for sale
Sellers are rarely prepared for the intense scrutiny they will be subject to by buyers of experienced buyers and their litany of professional transaction advisors. Investment banks can help business owners with this preparation which can involve everything from preparing detailed financial models and projections to in-depth customer analyses to working with management to prepare them for an intense transaction process.
- Educating and coaching the owner
The vast majority of business owners have never closed a transaction. Quality investment bankers have managed hundreds of transactions and can bring the benefits of that experience to the owner.
- Structuring the transaction
Transactions can involve various forms of consideration, such as cash, equity, seller notes, earnouts, and other forms of contingent consideration. Investment bankers can structure each transaction specifically to address the needs and desires of both sellers and buyers, thus providing creative solutions for potentially conflicting transaction objectives.
- Enabling owners to run the business
The transaction process is an intensive process for sellers to endure, especially as they are trying to run the day- to-day operations of their company. By taking on most of the day-to-day work, investment banks enable business owners to focus on growing their business rather than managing the transaction process, which typically lasts for between six and nine months.
In summary, engaging an investment bank or advisory firm should easily pay for itself many times over in terms of price and risk. Many owners only do this once, and they cannot afford to get it wrong.
Steve Zacharias, Managing Partner, Transact Capital Partners
1Article presented by Axial based on study completed by Fairfield University Dolan School of Business where professor Dr. Michael McDonald, surveyed 85 business owners who sold their businesses with the help of investment bankers for between $10 million and $250 million between 2011 and 2016. One-hundred percent of respondents said that the bankers added value to the process, with 69% saying the value-add was “significant.”