Last year Billy Fink, the fantastic editor of Axial's Forum, wrote an article that examined some of the benefits of hiring an M&A advisory firm to work for you in the eventual transition from your business. He went to the heart of the matter because one of the most important benefits of working with an M&A professional is simply this: The odds improve of you getting an optimal deal with a structure that suits your needs. You can read his entire article here: M&A Advisors Proven to Improve Valuations.
For those of you pressed for time, I will summarize some of the important ideas he shared. First, in terms of answering the age-old question of whether you need to hire an advisor and why, Mr. Fink wrote:
In an effort to definitively answer this question, several academics “analyzed a sample of 4,468 acquisitions of private sellers during the period of 1980 – 2012 to examine the decision and the consequences of hiring sell-side M&A advisors.”
The results bode well for intermediaries.
In the study, entitled Does Hiring M&A Advisors Matter for Private Sellers?, Agrawal et al. discovered that “private sellers receive significantly higher acquisition premiums when they retain M&A advisors.” Although “top-tier” intermediaries offered the highest acquisition premium, the benefit of the M&A advisor held true across all deal sizes.
OK, two key points can be gleaned from this paragraph and I have highlighted them: Sellers do conclusively receive more for their companies via the services of a qualified M&A firm AND this data applies to ALL deal sizes.
So the skeptics out there may be wondering, why? How can this be the case when I know exactly who my buyer will be? Well therein lies your answer: If you approach one buyer, the one you assume is your buyer (who usually is your closest competitor), you will not be creating a “limited auction” for your business, a vital step in getting an optimal deal. Again, this is how Mr. Fink describes this:
“Previous studies find that bargaining power is a significant determinant of the magnitude of private company valuations,” wrote the professors. “A key determinant of the seller’s bargaining power is the number of competing bids it receives.” Like supply and demand, “a seller has more negotiating leverage when a prospective buyer believes that it is competing with other bidders.” An M&A advisor helps drive acquisition premium by driving competition.
Best of all, the competition doesn’t even need to be real. According to Agrawal et al., the mere presence of an M&A advisor can induce a sense of competition.
Again, some critical points were made above. The most important is this: An M&A advisory firm, by its very definition, will force prospective buyers to consider that there will most likely be competitive bidders for your transaction, thus driving up its valuation. Could you create an actual limited auction on your own? Possibly, although unlikely, since you don’t have a database of thousands of buyers (like Generational Equity does, for example). Can you create the illusion of one? Unlikely, since most buyers will know you are only going to close one deal your entire life.
The fact that a professional M&A firm is a plus is really a given. The hurdle is convincing yourself to actually hire one. If you read Mr. Fink’s article to its terminus, the conclusion is pretty basic: To protect your single largest investment, hire an M&A firm.
Now it goes without saying that Generational Equity is an M&A advisor. What you may not know is that we recently closed our 500th transaction and have been ranked as the leading lower middle-market M&A firm for years.
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2016 Generational Equity, LLC. All Rights Reserved.
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