Without a “deal team” you will probably leave money on the table

 

Gary Miller

The Kansas City Star  

Business Columns & Blogs

 03/09/2015 8:26 AM      

Gary Miller: Without a ‘deal team,’ you probably will leave money on the table

By GARY MILLER

Last summer  Paul, called me to ask if I would help him sell his company. He had built a business from scratch and his revenues today are $30 million with an EBITDA (earnings before interest, taxes, depreciation and amortization) approaching $3 million. Paul had been in business more than 30 years, pouring his heart and soul into building a successful enterprise.

During our conversation I explained the need to prepare his company for sale before we take it to market and we will need to put a “deal team” in place to ensure he can realize the most value possible from the sale of his company. He asked me to explain the various roles of the deal team. I told him a strong deal team includes a consultant team leader, an investment banking firm, mergers and acquisitions legal counsel, tax counsel, and a wealth management adviser.

Paul asked whether he really needed all those advisers to sell his company — particularly an investment banker and M&A legal counsel. Here is the advice I gave him.

The value of a strong intermediary consulting firm and investment banker.

About 75-80 percent of all middle market companies for sale never close their transactions. One of the biggest mistakes business owners make is underestimating the value of a seasoned and qualified investment banking firm and what they can bring 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. Though it’s possible owners can sell their businesses on their own, often costly mistakes are made during the transaction process.

The right advisers bring critical skills, expertise and transaction experience:

▪ Most important is understanding your personal goals as there is life after the transaction. They can help you evaluate your transaction goals and timeline and help you select the best process for exiting the business. Advisers can help you think through what a successful exit looks like and help you understand there are more considerations than price when selling your company. For example, do you want to leave or stay with the company after closing? What concerns do you have for the company’s legacy, the management team and employees?

▪ They can help you polish your strategic business plan, help you clean up your operations, take you through a due diligence process similar to what buyers will do when examining your company and help you address any hidden “skeletons” in your financial records business operations.

▪ They will prepare marketing documents and an executive summary of your business — known as the “teaser”; a confidential comprehensive memorandum detailing your 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 the potential buyers, negotiate the transaction terms and help you close the deal.

This team allows you to run the business while they “run the process.” This is critical as it keeps business owners focused on managing the business and not becoming distracted, which can hurt business performance.

The value of an experienced transaction M&A legal team.

Paul asked whether he could use his current outside counsel since he was a trusted adviser and had served him well as long as he could remember. I told Paul that selling your company is not business as usual. It is an extraordinary transaction. You need counsel with significant transaction expertise to take you through the entire process. I explained that, more often than not, your lawyer who has provided excellent counsel for all manner of general business issues, contract negotiations and litigation management has little or no experience with anything but the smallest of merger or acquisition transactions. If you use him, this could be very problematic.

For most middle market transactions, you will need legal representation with resources appropriate to the size and complexity of the transaction. At the very least, the legal team should include an experienced partner, a senior associate and an experienced paralegal, each with expertise in corporate and commercial transactions with resources for particular complex subject matter such as tax issues and potential post transaction legacy liability.

In finding that representation, I advised him:

▪ Bigger may or may not be better. Plenty of large law firms will charge you top dollar. They have very specific expertise and lots of manpower at their disposal. For most middle market transactions, representation by 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 effect on the legal requirements of the transaction. Experienced M&A counsel can adapt to the basic legal requirements of most sectors and industries.

▪ Your lawyer is probably not your investment banker. They do not have their pulse on the current market conditions and pricing multiples. Also, lawyers are almost never set up to conduct an auction process and do not have a Rolodex of buyers readily at hand.

▪ The legal services required for most middle market transactions run a varied path from initial structure through post-closing matters.

The latest research indicates that business owners who use an expert deal team greater chance of success in selling their businesses 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 — in addition to the mistakes that are avoided by using a strong deal team.

Gary Miller is founder and CEO of GEM Strategy Management Inc., advising middle market company owners how to maximize the value of their companies, leading them through the transaction process, raising growth capital and building strategic business plans for growth and expansion. Reach him at 970.390.4441 or gmiller@gemstrategymanagement.com.

Read more here: http://www.kansascity.com/news/business/biz-columns-blogs/article13076540.html#storylink=cpy

 

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