M&A Source | The Bridge
Last summer, Paul called me to ask if I would help him sell his company. He had built a business from scratch, and after 30 years, his revenues were pushing $30 million, with earnings — before interest, taxes, depreciation and amortization — approaching $3 million.
During our conversation, I explained the need to prepare his company for sale before we take it to market and that he needed a “deal team” — a consultant team leader, an investment banking firm, mergers and acquisitions legal counsel, tax counsel and a wealth management adviser —to ensure he realizes the most value possible from the sale of his company.
Paul wondered if he really needed all of those advisers — particularly the investment banker and M&A lawyer. In fact, there is high value in all of their counsel. The deal team allows an owner to “run the business” while they “run the process.” This is critical as it keeps owners focused on managing the business and not distracted, which can negatively impact performance.
The right advisers help a seller set goals and identify strategies for exiting the business, help polish the strategic business plan and help clean up operations. They also take a seller through a due-diligence process similar to what buyers will do and help identify skeletons in the financial records. They also will prepare marketing documents and a high-level executive summary known as the “teaser,” as well as a confidential comprehensive memo detailing transaction goals, financial and operational performance, industry and market position, management team, competitive advantages, intellectual property and other market differentiators.
Experienced advisers will build a buyer list, take you to market, narrow down the potential buyers, negotiate the transaction terms and help you close the deal.
However, up to 80 percent of all middle-market companies for sale never close their transactions.
One of the biggest mistakes business owners make is underestimating the value that a seasoned and qualified investment banking firm brings to a transaction. There is a misconception that investment banking firms charge exorbitant fees for very little work. Nothing could be further from the truth.
An investment banker typically has his/her fingers on the pulse of current market conditions and pricing multiples, and her team is set up to conduct an auction process and has a Rolodex of buyers at hand.
Paul also wondered if he could use his current outside counsel since he was a trusted adviser and had served him well as long as he could remember.
But selling a company is not business as usual. I explained that a lawyer who has provided excellent counsel for all manner of general business issues, contract negotiations and litigation management has, more often than not, little experience with anything but the smallest of merger/acquisition transactions — which could be very problematic.
The legal demands of a middle-market transaction vary depending on the size of the business and the complexity of the transaction. But as a rule of thumb, the team should, at the very least, include an experienced partner, a senior associate and an experienced paralegal, each with expertise in corporate and commercial transactions. The team also should have access to resources for subject matter such as tax issues and potential post-transaction liability.
I advised him that a bigger, more expensive firm may not be better. They have very specific expertise and lots of manpower at their disposal, but for most middle-market transactions, smaller to mid-size firms will be far less expensive and may be of higher quality.
The sector a company does business in usually has little impact on the legal requirements of the transaction. Experienced M&A counsel can adapt to the basic legal requirements of most industries, but hire the best team you can afford. They will be a business owner’s guide on the varied path from structuring the deal through post-closing matters.
The latest research indicates that a business owner who uses an expert deal team has a far greater chance of success in selling their business than those who don’t. Don’t be penny-wise and pound-foolish.
Often your deal team will be able to negotiate a higher multiple of your EBITDA with much better terms than a business owner who tries to sell his own business.
Gary Miller is founder and CEO, GEM Strategy Management, Inc. an M&A management consulting firm specializing in middle market privately-held companies. Gary’s team provides advisor services on M&A planning, exit planning, business transfers, preparing companies to raise capital, or owners to sell their companies, due diligence, valuations, and merger integrations. You can reach Gary at 970.390.4441 or firstname.lastname@example.org