Do You Need an M&A Advisor to Sell Your Business?

By Generational Equity


The question arises with nearly every potential client we meet with: Why do I need an M&A advisor to sell my business? Can’t I just do it myself and save a significant amount of money in fees? How hard can it be to close a deal with a buyer? I negotiate contracts all the time with my clients and vendors.

And the answer is always the same: You can sell your company on your own. Businesses change hands all the time without professional representation for either party. But going in you have to be aware that it will cost you in other ways if you go forth on your own. For example, you need to plan on spending at least 1,000 hours of your own time spread throughout 9-18 months to close a deal with an optimal buyer. This is an intangible cost that you will need to factor in order to adequately market your business.

But that is just one cost to you that needs to be considered. In reality the benefits of having professional M&A advice far outweigh the fees involved. According to PE Hub, a leading online publication that tracks the private equity world, here are a few of the benefits that an M&A advisory firm can bring you:

Investment bankers can add significant value in an M&A process…Typical benefits of having a banker in an M&A process include:

1) Having an agent to advise on market trends and valuation

2) Approaching potential acquirers with which the target’s executive management would not otherwise have contact

3) Taking the difficult, “bad cop” negotiating position

4) Co-managing the sale process with the target’s legal counsel

We would obviously concur with all of these. Each, individually, is equally important. But to this list I add one more: Hiring an M&A advisory firm allows you to focus on running your business while your advisor manages the M&A process.

As mentioned, 1,000 hours of your own time is typically required to close a deal. Hiring an M&A advisor will free those 1,000 hours up, allowing you to focus your attention on the company itself. And why does this matter? Because all buyers focus on one key issue when negotiating: How is the company doing in the current fiscal year? Are they achieving their projected revenue and profit goals?

Too many business owners who do not have representation make the mistake of ignoring the operations of the company while in market. Nothing can kill a deal faster than a buyer learning that the 10% projected growth shown in the pro forma for the base year is actually trending to be far less.

Risk vs. Reward

A scenario like this raises several red flags for buyers. First, it implies that the company is more dependent on the current owner than promised. If a seller is spending all of his/her time dealing with buyers and the company is suffering, then a buyer will have concerns that the trend will continue upon the eventual departure of the owner. The last thing you want to demonstrate to a buyer is owner dependence!

Secondly, it will call into question your entire 5-year pro forma projection. If the base year, the current fiscal year that you are marketing the company in, is off by a significant percentage, then during negotiations buyers will make adjustments to your future earnings as well and/or increase the discount rate used to calculate the present value of future cash flows. Either way, the ultimate valuation of your business will suffer and you will not only get less for your company, you may be required to stay with the business in the form of an earn-out for 2-5 years post-acquisition in order to reach pre-determined sales and earnings levels – which will dictate ultimately how much you get for your company.

These scenarios you definitely want to avoid. Why risk your financial legacy and most likely your family’s entire net worth by going cheap and not hiring an M&A advisor? The costs in terms of chips left on the table far outweigh the expense of an advisor’s fees. Don’t just take my word for it; listen to some of our clients who have reaped the financial rewards of hiring Generational Equity to represent them.

Hopefully by reading this article you have a better understanding of the value M&A advisors bring to middle-market companies. One final thought: For many of you the sale of your business will be the ONLY M&A transaction that you participate in in your lifetime. Do you really want to trust the success of the deal to a novice (you) vs. using a team of professional advisors like Generational Equity brings to the table?

No need to answer that question!

Carl Doerksen is the Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC All Rights Reserved