You’ve spent years, decades even, building your business. And along the way, you’ve figured things out, learned from your mistakes and realized success. Now you’re ready to consider an exit strategy; maybe you’re thinking about selling imminently, or in the next five years. You have friends and colleagues who have gone through this. Some have hired M&A advisors, while others opted to do it themselves, as they’ve always done, avoiding advisory fees in the process.
What should you do? Does an M&A advisor create tangible value in a sale of business or, given the associated fees and the knowledge you have of your industry, does it make more sense to do it yourself?
Does an M&A Advisor Add Value?When Valitas Capital, an M&A advisory firm, set out to quantify the value of hiring an M&A advisor, they recognized that their own views would (rightfully) be perceived as biased, so they sought out independent sources to provide answers. While they found several relevant discussions and papers, the most compelling, because of the authors’ independence and the significant sample size examined, was a research paper from the University of Alabama that specifically considered whether "Hiring M&A Advisers Matter[s] for Private Sellers".
The authors gathered a sample of 3,281 acquisitions of private sellers obtained and cross-checked using three separate data bases. While 47% of these sellers hired an M&A advisor, the remaining 53% did not. Studying the valuations received by the two groups, and analyzing them by sector, the authors concluded that private sellers receive significantly higher acquisition premiums when they retain advisors, in the range of 6–25%.
Others have reached similarly positive conclusions. A recent paper (Dr. Michael McDonald's "The Value of Mid-Market Investment Bankers") from Fairfield University reported on a survey of mid-market business owners that retained M&A advisors to facilitate their sale process. Most respondents were pleased with the overall performance of the firms they hired. "Managing the M&A process and strategy" was cited as the most valuable service provided by advisors, and 84% reported that the final price was "equal to or higher than the initial sale price estimate provided by the investment banker".
Circling back to the initial question, it appears that hiring an M&A advisor does create tangible value for a private seller in the form of a higher acquisition premium (a higher price). But how, specifically, do M&A advisors create that value? And if advisory fees are factored into the mix, does the seller still come out ahead?
Why do adviser-assisted private sellers receive an acquisition premium?
The resources and infrastructure of a reputable M&A firm provide benefits that a private seller is unlikely to access on his or her own, including:
Increasing the seller’s bargaining power — M&A advisers typically have information resources and relationships they can use to identify potential financial and strategic buyers that are unknown to the business owner. An interested pool of buyers can generate competing bids and healthy competitive tension, which strengthens the seller’s negotiating position;
Providing valuation expertise — By providing comprehensive valuation analysis, the adviser can help the seller to establish the value of the business and assess the reasonableness of any bids;
Bridging the information gap — Private sellers often sell at valuation discounts to their public peers, a discount related to the lack of publicly available information associated with private companies. An M&A adviser can facilitate confidential access to information for interested prospective buyers, and possibly reduce the valuation discount.
Managing the process — An adviser has the expertise and infrastructure that allow for efficient management of the sales process, from creating competitive tension to ensuring confidentiality, managing an auction process with multiple bidders and negotiating terms of the sale price. A private seller, while expert in his or her own business, is likely lacking in this type of knowledge and resources.
While the evidence suggests that using an M&A adviser yields a higher sale price, how do advisory fees factor into the mix? Specifically, what’s left of the acquisition premium after fees are netted out?
A recent survey of mid-market transaction fee structures within North America provides answers to this critical question. Respondents, the majority of whom identified themselves as "investment banker/M&A adviser", provided data on their success fee percentage by deal value. Advisory fees varied by deal value, with the distribution set out below.
The majority of respondents reported that they would charge fees of 2–6% on a $5 million deal, 2–4% on a $20 million deal, and 1–4% on a $50 million deal. Given the finding that adviser-assisted private sellers receive an acquisition premium of 6–25% relative to their unassisted peers, it is reasonable to conclude that, net of fees, M&A advisers do add tangible value to a private sale process.