M&A Advisory Firms – The Critical Role They Play

By Generational Equity


Last month Mergers & Acquisitions magazine, published by the ACG (Association for Corporate Growth), produced an article that I found quite interesting. The piece, “Precision Sourcing,” focused on how equity firms historically have worked on sourcing acquisition targets. It was a very well written piece, and it caught my eye because it indicates why owners of middle-market businesses need professional representation when they are looking for buyers.

First, nearly all the equity firms interviewed begrudgingly admitted that although they liked to source deals directly for a variety of reasons (not the least of which is they typically pay less), they admitted having an M&A intermediary involved was helpful for two reasons:

  • Intermediaries can have a great impact on a deal getting closed.” – Bruce Evans, Managing Director of TA Associates
  • Companies that have hired investment banks are more committed to selling and their valuation expectations have been vetted.” – Mark Jones, a Partner with River Associates

These are both valid points. Without professional representation, the typical business owner is facing a daunting task. The first hurdle is determining what the business is worth, then creating documentation to support that, and finally finding buyers willing to meet their value expectations. Professional buyers that we deal with indicate that our clients have a much more realistic idea of their businesses’ values because they have spent weeks and months with an M&A advisory firm during the evaluation phase.

In addition, Generational Equity has teams of extremely experienced dealmakers, many of whom have been focusing on closing deals for more than 20 years in this niche. This gives you the advantage of dealing with a team that has most likely seen every potential deal breaker out there.

Finally, and most importantly, equity firms want to deal with committed sellers. These buyers look at hundreds – if not thousands – of deals annually. Once they narrow this down to a few dozen, the time it takes to close two or three is amazing.

The one thing that equity firms have little of is excess time. So the last thing they want to do is spend 5-6 months in due diligence only to have a non-committed seller back out at the last minute. Sellers who hire intermediaries give professional buyers more confidence that the business owners are committed to selling. Paying an upfront fee proves that to them.

Your Goal: Attract As Many Buyers as Possible

Years ago when the private equity industry was in its infancy, most firms would cold call potential sellers. This was a very time-consuming process, but it gave the equity firm a huge advantage: They could offer rock-bottom prices and sellers would agree.

Soon sellers recognized this and so too did investment banks that had focused traditionally on very large deals. Many started moving downstream into the lower middle-market to fill a need consulting with smaller businesses. By the time the private equity boom of the mid-2000s hit, according to Mergers & Acquisitions:

“Just about every deal that was completed was represented by an investment banker. Even mediocre companies were able to command high purchase price multiples during this time frame.”

This brings up another advantage of using an M&A advisory firm: the limited auction. As we all know, prices go up if there is more demand than supply. Auctions are great ways to create this supply-demand deficiency.

You have one company. If you have multiple buyers interested in your company, you will most likely get more for your company. Using an M&A intermediary gives you this opportunity. Again, according to Mergers & Acquisitions:

“Many private equity professionals still look for ways around getting into a situation where a potential asset is represented by a banker, and multiple firms are bidding for it.”

If you use an M&A consulting firm to represent you, chances are better that you will have multiple buyers interested in your firm than if you sell it on your own. Professional buyers know this and will pay a lower price accordingly if you have no representation. As Mergers & Acquisitions put it:

“Dealmakers admit that sell-side advisers can certainly help a process run smoothly and, although the price might be higher than if the deal was proprietary, the certainty of close as well as sellers’ expectations are more in check.”

So, even professional buyers are willing to pay a premium if an M&A advisor is involved BECAUSE the deal has a higher chance of closing. This is critical for you to remember as you approach the sale of your company.

You only have one chance to get it right. And getting it right not only means closing the deal but it also means getting an optimal deal structure and price for your company. Many sellers without professional representation leave significant value at the table. You can see why when you look closely at this quote from Kevin Lindsey, founder of DVS Group:

“If you look at our average transaction multiple, we have only one transaction out of the last 50 that exceeded five times EBITDA (earnings before interest, taxes, depreciation and amortization). We have never been about an auction environment. But the ONLY way to avoid an auction is to source and engage directly with the seller and be the first one in.”

Bottom Line: Knowledge is Power

So what have we learned? Clearly if you want top dollar for your company, your odds go up if you have professional representation. Even professional buyers are willing to admit that. They have even told us that! It proves to them that by hiring an M&A firm that you are committed. It also creates a limited auction opportunity that can benefit you.

If you are at the stage in your life where you are considering divesting your company or looking for an equity partner for growth, you need to engage with an M&A firm to discuss your options. Generational Equity is recognized as a leading lower middle-market M&A advisory firm. Our dealmakers have successfully been selling companies to optimal buyers for decades.

If you are interested in learning more about us, I encourage you to call us at 972-232-1121 or fill out a contact form. We hold no-obligation M&A seminars around the country and would be glad to meet with you privately to discuss your situation and specific needs.

If you do decide to market your company on your own, keep the statements from these professional buyers in mind. Hopefully you will be able to avoid many of the mistakes that entrepreneurs make when selling by doing so.

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