In Summary:
- Expertise beyond just the “Scientific Value.”
- Enhanced bargaining power.
- Better access to information.
- Increased confidence.
- A sustainable process.
You’ve built your business from the ground up, and after decades of hard work, dedication, and sacrifice, you’ve decided it may be time to sell your business. Do you know where to start? How do you know what it is worth? Do you have buyers lined up? Among these many questions, a larger one stands out: should you hire an M&A firm? While advisory fees may discourage business owners from bringing on an M&A team, typically the benefits far outweigh the costs.
A study from the University of Alabama, led by Professor Anup Agrawal, analyzed over 3,000 private seller transactions, 47% of which employed an M&A firm. The study found that those 47% of sellers received up to 25% more for their businesses. So, what exactly do M&A advisory firms do to extract that additional value for sellers?
1. Expertise beyond just the “Scientific Value”
The value offered by buyers in a competitive process is comprised of 65% science and 35% art. The “Scientific Value” includes Financial and Process Enforcement Value. Said another way, primarily the cash flow and surface level perception of a business. The “Artistic Value” includes Tailored Positioning and Proactive Communications. The Artistic Value is difficult to unlock without the assistance of an M&A advisory firm.
The Science:
“The Science,” or 65% of the value, represents the value offered by potential buyers based on Financial Value and Process Enforcement Value. Financial Value is primarily determined using one of the standard approaches to valuation, including the Asset Approach, the Income Approach, or the Market Approach. Each model has its own nuances. Whichever approach(es) is taken, Financial Value considers both historical financial performance and expected future performance. The Process Enforcement Value, unique to each buyer, is primarily based on the efficiency of the sale and the qualitative elements of the business.
The Art:
“The Art,” which an M&A firm brings to the table, can extract that additional 35% of value. Decision-makers at large multinational firms are not just looking for information or financials, as those rarely persuade them to act. The perception of how the information is presented or conveyed goes much further than the information itself. “The Art” recognizes the motivations and needs of buyers and, in turn, presents the business in a more compelling way through tailored positioning. Tailored positioning frames your unique and often hidden value drivers in a way that encourages internalization from the buyer. In other words, the buyer begins to focus on their needs instead of yours, which provides rationalization for paying a higher price. By combining intangibles (brand, culture, IP, market position) and post-acquisition synergies (integration and diversification benefits), tailored positioning extracts unrealized value in almost every transaction.
2. Enhanced bargaining power
Partnering with an M&A firm strengthens your bargaining power in several different ways. First, established firms have critical information resources on strategic buyers. With their vast pool of contacts, they possess an intimate knowledge of the needs and desires of buyers. Consequently, firms can gather buyers explicitly tailored to what your business offers. Relatedly, and perhaps most importantly, in assembling a pool of potential buyers, M&A firms facilitate a competitive bidding environment. Unquestionably, a seller has exponentially more negotiating leverage when buyers believe they are competing with other bidders. This competitive environment helps drive acquisition premium, while M&A experts possess the tact to navigate the bidding frenzy.
3. M&A advisory firms have better access to information
Undoubtedly, M&A advisory firms have better access to information about every aspect of transactions. Not only does their expertise guarantee superior, comprehensive market insights, but they also have access to buyer information, patterns, and purchasing history you may not otherwise obtain. Further, M&A firms can facilitate access to confidential information, overcoming the informational opacity in the private sector. In sum, and echoed by Agrawal et al., M&A intermediaries have “greater economies of specialization and information acquisition, and have lower search costs than their clients.”
Furthermore, there is a notable gap in information between first-time sellers and investors in the private sector. This gap creates a discrepancy in the valuation offered by the buyer and an informational disparity for the seller. M&A advisors bridge this gap on both sides, both of which benefit the seller. First, the actual value of the business is determined through a rigorous business valuation process performed by the firm rather than with the limited public information available to the buyer. In this respect, the value (or price) presented to the buyer more accurately reflects the true and total value of the business. M&A firms can aid in intangible synergistic realizations as well– benefitting the buyer while presenting a more enticing package to potential targets. Second, and more obviously, the seller is better guided by the knowledge, experience, and expertise of the M&A firm throughout the entire transaction process.
4. Increased buyer confidence with M&A advice
When you go to the market, appearance matters. Partnering with an M&A firm increases buyer confidence in your sale. You appear more committed to selling (and selling effectively) by simply hiring an intermediary. Experienced buyers recognize the expense of M&A advice and representation and will likely acknowledge that you are closer to closing a transaction; a top-notch M&A firm will ensure that your business is absolutely ready to go to market before bringing it to qualified buyers. In other words, your business will be represented by the reputation of the M&A firm, which certifies the quality of a business to potential target buyers. With an M&A expert at the helm of the transaction, buyers may feel more confident in the selling party’s objectivity, process efficacy, and negotiation prowess.
5. Infrastructure that can sustain the complexities of the M&A process and beyond
Sellers may be experts in their respective businesses but may not possess expertise in the M&A process. M&A firms employ teams of experts that specialize in each aspect of the transaction. With connections, information, and plentiful resources at their disposal, firms are better equipped to handle obstacles and long-term transactions; advisers can facilitate timely information transfer between the seller and potential buyers. Most importantly, you can avoid transaction distraction and focus on running your business as you normally would.
Cultivated by years of M&A experience and supported by knowledgeable teams, proactive communication by M&A advisors can take substantial burdens off sellers while ensuring effective negotiation and timeliness throughout the transaction. From pre-deal through close, efficient communication helps greatly enhance the value. An M&A firm can:
- Adapt quickly to changing environments.
- Understand and appeal to buyers’ motivations and needs.
- Navigate challenges such as information leaks, rumors, internal discord, and litigation issues with trust and confidence.
- Delicately balance a competitive bidding tension and the spirit of collaboration.
- Ensure that you are informed at all times with clear and accurate information and attainable, explicit goals.
Hire an M&A consultant: Make Persient your first call
M&A advisory firms provide substantial value when selling your business, most importantly, allowing you to remain focused on running your business. Although you may feel like you are relinquishing control of the sale when you hire an M&A consultant, building a partnership is the first step towards exiting on your terms. With advanced insights, better bargaining power and access to information, and sustainable infrastructure, an M&A firm should be your first call when looking to sell your business. Persient is proud to go the extra mile for our clients and extract the value you deserve for your greatest asset. Our team has been helping middle-market business owners in Southern California and globally achieve successful exits. We are committed to walking with you every step of the way. Get started with our team today.
Investment banking services and securities offered through Independent Investment Bankers Corp., a registered broker-dealer, Member FINRA / SIPC. Persient LLC and Independent Investment Bankers Corp. are not affiliated entities. FINRA Broker Check
