If you are considering selling your
company, your situation is analogous to a person facing major surgery.
For that individual, the most important decision will be the surgeon
to perform the operation. That decision will likely determine if and
how quickly, the individual returns to complete health. Your critical
decision before proceeding with the sale process is, “What investment
banking/advisory firm (advisor) should I retain to handle the transaction?”.
This decision will likely determine whether you achieve a premium-priced
deal with minimal risk to post-closing liabilities. If you are the owner
or CEO of a middle market company, defined as companies with a transaction
price between $2-$250 million, the importance of this selection is probably
even greater, as many advisors serving the middle market are less than
What are the characteristics of an advisor that will produce a premium-priced
deal? This article defines the key factors to investigate, if you are
to find the right advisor for you.
1. Your advisor should have an open and verifiable “track
record”. He/she should be willing to discuss any non-proprietary
information related to a prior deal except for the transaction price
and deal terms. The advisor should provide you a thorough list of completed
transactions, which defines both sellers and buyers. This record should
be made available for your unrestricted investigation. These deals should
be supported by references that you can directly contact to substantiate
the advisor’s claims relating to prior transactions. Talk to the
advisor’s former clients and decide if their record warrants hiring
them to handle the largest transaction of your career.
As a general rule, an advisor should consummate two deals per professional
person per year to be defined as “reasonably good”. An “outstanding”
firm should have a long-time record of consummating 3-4 deals per person
2. You want an advisor that guides you from the beginning to
the end of a transaction. He must be able to help you plan
and time the sale. In addition, he must control all aspects of the deal.
His job should not end when a Letter of Intent (LOI) is executed. The
advisor should be your lead negotiator from the LOI until the execution
of the Definitive Purchase Agreement (DPA). This requires they possess
highly specialized knowledge in the area of reps, warranties and indemnifications.
These are critical issues, whose financial consequences can potentially
be as financially significant as the purchase price. The normal terms
that acquirers usually obtain in these areas are generally accepted
by most legal counsel as adequate. However I believe these normalized
terms leave a seller in a precarious post-closing situation, which could
cause them to potentially lose a significant portion of the sale proceeds.
Consequently, your advisor must have an intimate familiarity with these
issues and have the capability to control the deal process from the
LOI to the execution of the DPA. This will assure you the maximum protection
in the reps, warranties and indemnifications.
3. For you to obtain a premium price, your advisor must be tough,
aggressive and determined. This is necessary to convince a
strong-willed, sophisticated acquirer that things are going to be done
in a way acceptable to you. The advisor must understand the leverage
points that will pressure an acquirer to provide your desired price
and deal terms.
It is often beneficial for middle market sellers to retain an advisor
that is a self-made man or woman. This type of advisor will probably
be an entrepreneur just like yourself. Correspondingly, he will better
understand your make-up and the things important to you. This should
enable him to negotiate a deal that will fully satisfy your needs. In
addition, he should be more capable of helping you deal with the myriad
of post-closing emotions that a seller often has in the months following
a deal’s completion.
4. You want an advisor that takes a business-oriented as opposed
to a financially-oriented approach to the valuation and sale of your
company. Most advisors believe the sale process is only a financial
exercise. Nothing could be further from the truth. Ask yourself the
question, “Do all publicly-traded companies in a specific industry
trade at the same multiple of earnings?”. Obviously, the answer
is no. The reason is because of the differences in the companies’
business foundation and what this portends for future growth and/or
threats to earnings. The only way a seller’s business foundation
can be evaluated and a determination made about the company’s
future growth opportunities and/or risks is by your advisor’s
thorough pre-sale investigation of your business foundation. This includes
a detailed investigation of the capabilities of your company’s
operations and production, marketing, personnel, facilities, purchasing
and operational cost efficiencies, and demographic considerations related
to your industry. By the time the process is concluded, the advisor
must thoroughly understand your business niche, and how it correlates
to future growth and profitability. This will enable an accurate forecast
of future profitability and EBITDA.
Many advisors either do not possess the capabilities or are unwilling
to spend the time to perform this business investigation. Utilizing
only a financially-oriented approach will likely have a serious negative
impact on your transaction price.
5. Your advisor should have a history of doing all-cash deals.
This type of deal is conducive to minimizing your post-closing exposure.
Excepting certain highly unusual situations, there is no good reason
for a seller not to do an all-cash deal. Advisors that recommend their
clients accept other than all-cash deals are being overly accommodative
to an acquirer’s needs at the expense of their client.
6. You need an advisor that clearly articulates his advice and
ideas in a manner that provides strong guidance to a client.
The advisor must have the strength of will, the breadth of knowledge
of the acquisition process, and the ability to convey that to a successful,
independent entrepreneur in a way conducive to make the seller want
to follow his advice. Although the ceding of a minimal amount of control
is often difficult for a successful entrepreneur, it is necessary if
the seller is to maximize their transaction price. They should allow
a qualified and proven advisor to guide and direct the process as the
seller does not have the market expertise or experience to make independent
judgments on how to professionally handle the sale process. Although
the advisor should direct the process, the seller should always retain
the unqualified right to make all decisions regarding the acceptance
or rejection of specific deal pricing and terms. Only the seller should
make those decisions.
Any seller that is foolhardy enough to want an advisor they can totally
control is making a critical mistake. They should realize that any advisor
who can be dominated by his client will also be likely dominated by
the acquirer. What the seller really needs is the rare advisor with
the proven record of being able to control large, sophisticated acquirers
and obtain premium prices for their clients.
7. If it is necessary to transact a premium-priced deal, your
advisor must be patient. You don’t want an advisor committed
to a quick sale, regardless of price, as the objective is to consummate
a deal only after a premium-price has been obtained. Until that is realized,
no sale should occur.
Although the normal time to transact a deal is usually 6-12 months from
when an advisor starts evaluating the company, in unusual situations
it might take 2-5 years to consummate a premium-priced deal. In these
cases, probably about 5-10% of total deals, a much longer time is required
if the seller’s legitimate objectives are to be fully satisfied.
Discuss their overall record with a potential advisor. If they have
not taken an extremely long time to successfully complete a few sales,
it probably is indicative they are more interested in “churning
deals” at less than a premium price than in getting maximum value
for their clients.
8. If a company has multiple shareholders, who have significantly
different financial and personal objectives and/or personal problems
with each other, it becomes even more imperative to find a strong-willed
advisor. The advisor must have the expertise to develop a solution
to reasonably satisfy all shareholders, and the ability to articulate
why the compromises inherent in his solution will fairly benefit all
shareholders. This mandates not only a strong and forceful advisor,
but also one that has compassion and understanding. This will facilitate
his appreciation of the significance of the personal reasons, objectives
and conflicts that make certain divisive issues important to particular
shareholders. In this way, a compromise can be developed that will make
all shareholders agreeable to the solution.
There is no one approach to a sale that is appropriate for all sellers.
For an advisor to be consistently successful, he must be creative. An
advisor that takes the time to understand your company, yourself, and
your needs will be able to determine your “recipe for success”.
This advisor should be able to sustain the positions that will satisfy
your personal objectives and provide you a premium-priced deal.
When you are selecting your advisor, you should not be looking for the
advisor with the most pleasing personality, nor should the length of
time that you have known him be a consideration. This will probably
be the largest transaction in your life, and the right advisor should
add at least 10-20% to your transaction price. Apply those percentages
to your expected transaction price, and then decide what characteristics
are the most important to you. I think you will probably come to the
conclusion the most important characteristics that you need in your
advisor are: knowledge, experience, character, integrity and toughness.
When you find these five characteristics, you will have found the advisor
that will likely add 10-20% to your purchase price.