Headline: How to survive in the wild west: M&As debunked

While you might not see a mergers and acquisitions advisor ride into town on horseback, you’ve still got to find a way to identify the cowboys. The trouble is, so many of the people you may turn to for help selling your business will call themselves a ‘M&A advisor’, but their skills could be wildly different to one another. Read on for an explanation of the two ends of the M&A scale, and for our advice on how to make the right choice for your business….

The business broker

 The wide spectrum of M&A advice can be well-explained in the analogy of real estate and the agents you hire to sell your property. The business broker in this story is the real estate agent; introducing the buyer and the seller, making sure the transaction is completed and getting paid to do so. The ideal environment for a business broker will be deals like this:

• -Less than $5 million purchase price
• -Commission of 5-12% on purchase price
• -An owner/operator-style business
• -Business advertised for sale using classified-style ads
• -The new business might well be bought with a loan against the asset, just like a mortgage on a house
• -Broker does 20+ of these deals per year

What you need to watch out for is how to identify who it REALLY is you are working with. Are you dealing with a skilled and experience-rich advisor or just a glorified salesperson? If you are working with a broker that is only chasing deal flow you might not get a load of additional insight, like how to restructure your corporate structure in order to maximize the sale value of the business. In fact, just like a real estate agent, there is a chance you might be advised to drop your price just to get a deal done so someone can get a nice healthy slab of commission and move on to the next deal.

There are plenty of excellent business brokers out there, but a lot of people get burnt by having the wrong expectations of a business broker that may not be fit to handle their deal. You need to understand what the qualifications are of the person sitting in front of you, how they find the potential buyers, and how much work they are willing to put into your deal to get it done THE RIGHT WAY, with the highest dollar amount in your pocket… NET.

Investment Banker

Where the business broker was the real estate agent helping someone buy/sell a house, the investment banker is more like the fund manager of a Real Estate Investment Trust (REIT). Just like a professional real estate investor is concerned with dollars per door, utility cost, contractors, neighborhood attractiveness; the professional M&A Banker does the same for companies. They would have a team of people analyzing everything they can find in a business, i.e. revenue, concentration of customers, prospects of growth… basically everything we talk about from the John Warrillow value builder system.

Their style of taking a business to the market (selling it) is a lot more strategic and proactive. It is not unusual for an investment banker to broker the sale of a business to a buyer who wasn’t originally in the market to buy anything. Having thoroughly researched sometimes hundreds of companies in the relevant marketplace, an investment banker may contact one of the companies and say “You should buy company X and this is why….. you could buy the company and cover the cost in 36 months this way etc. etc.”

Investment banker:

• -Over $5 million purchase price
• -$1.5 million+ EBITDA
• -Retainer & success fees rather than straight commission
• -Longer sale cycle, sometimes years
• -One or five deals per year

Double due diligence

So the onus is on you, the business owner, to work out whose advice you need to take. You basically have to do the due diligence on someone before you let them do yours. Regardless of the title of the person you hire just know where their skills come from and why. Questions you need to ask:

• What business have they sold previously?
• How many deals do they do per year?
• Do they work entirely on commission, or is there a retainer?
• What is the commission rate?
• Do they find most of their deals for sellers or buyers?
• What is their close rate for deals on the table V deals done?
• What is their process for finding buyers?

Top-level advisors

Rather like doing due diligence on someone to give them the right to do due diligence on your behalf, you basically need an advisor to advise you about your advisors! It might sound complex but it’s actually very sensible to have someone who is effectively the quarterback of the whole thing, filtering out all of the emotion and the different agendas of the advisors in the process.

But what do we know??? That’s only what we do every day 😉

* For an excellent in-depth look at the marketplace for advisors, we recommend this article written by Peter Basils: https://www.exits.com/blog/ma-advisor-fees-selling-business/