For many business owners or C-suite executives, engaging an investment banker or M&A advisor is an obvious first step in buying or selling a business. For others, however, the decision to hire an investment banker and the value one brings to the transaction process may be less apparent.
When questioned about the value an investment banker brings to the transaction (and to a greater extent, the business itself), business owners and executives who have previously completed an M&A event have collectively offered the following benefits as evidence of value added throughout the transaction process.
Transaction readiness is paramount to a successful M&A transaction, both as a seller and an acquirer. Preparation goes well beyond simply compiling corporate documents and financial statements and should form the foundation from which to conduct the entire transaction. The following are some of the top-level goals that should be addressed when preparing a company for the transaction process.
- Organize and prepare the business and its records for sale;
- Screen for critical financial, tax or business issues in advance and develop appropriate strategies to resolve them;
- Identify and develop strategies to unlock hidden value (i.e. strategic growth planning);
- Develop/refine the business model and financial projections while providing documentation and support for the assumptions;
- Determine the strategy for marketing the business and ensure alignment with management’s guidelines and concerns for the transaction (i.e. confidentiality, highest price, etc.); and
- Educate management on the elements of the transaction process and prepare/train for the presentation of the business and the management team.
Professionally Managed and Efficient Process
Running an efficient process is by far the most valuable aspect of hiring an investment banker. In fact, value is often created or, at a minimum, maintained by an efficient and professionally managed transaction process. Unfortunately, the alternative is also true; that is, the lack of an efficient and professionally managed process will almost certainly diminish a company’s value. By utilizing an experienced investment banker, privately owned middle market companies can close the experience gap and/or minimize any disadvantages that might exist when pursued by larger buyers, who likely have more experience in executing transactions.
Having a well managed and efficient process will maintain forward momentum throughout the entire transaction cycle while minimizing wasted effort on uncertain buyers and irrelevant or unreasonable information requests.
Creating a Market
A company’s valuation often correlates to the demand for that company (or its assets); as such, a critical component to achieving the highest possible price is the effectiveness of the investment banker’s ability to generate an adequate number of qualified offers. By creating a competitive environment of potential buyers, a company’s management team can reliably assess the market’s value with supportable market driven evidence, thereby demonstrating deliberate efforts to increase shareholder value.
While management should never abdicate all decisions making authority of the M&A process to a third party, it should, however, consider the opportunity costs of proceeding through the transaction process alone and the effects it will likely have on the day-to-day management of the business. Engaging an investment banker or M&A advisory removes many of the burdens of the transaction process and minimizes operational interruptions. Further, it facilitates the continuity of management’s existing financial and strategic initiatives, which in the absence or deprivation of, would likely create concerns over future growth potential (and, at minimum, would require an explanation to the other parties involved).
The most important document when marketing a business for sale is the information memorandum. It is the initial marketing document that demonstrates the value of the business to potential buyers and, if professionally prepared with an appropriate level of detail, can create instant credibility for a seller. Having credibility doesn’t help much on a company without substance, however, it goes a long way when potential buyers can immediately see the value and quality of a business by reviewing a succinctly prepared information memorandum.
Valuation is usually one of the first topics a company wants to understand before committing time and resources to a lengthy transaction and investment bankers are frequently at the forefront of those discussions. As such, investment bankers and M&A advisors typically have a high degree of technical expertise and a robust understanding of current market conditions that can be leveraged when determining the initial ranges of value. Additionally, as letters of intents are received from potential buyers, investment bankers create additional value by providing an assessment on the reasonableness of each of the indicated values alongside the proposed deal structure and terms to determine the total impact on shareholder value.
Negotiating all the deal points that come up throughout the M&A process can stress all parties involved and when discussions start down a contentious path, investments bankers are there to act as unemotional intermediaries (sometimes mediators). The absence of this buffer has the potential to stress the buyer/seller’s long-long term relationship, which is critical if management is expected to continue working with the company after closing (which is usually the case). By engaging an investment banker, integration efforts are preserved and the professional relationship between buyer and seller are more likely to strengthen and produce a more favorable outcome for all parties involved.
The middle market is an inefficient and uncertain environment with little to no publicly available information, which makes M&A difficult for most middle market companies. Middle market investment bankers are a great source of financial and strategic expertise when it comes to conducting M&A transactions and will typically have more experience than many middle market companies. By engaging a skilled investment banker, business owners and executives minimize the natural disadvantages created by these middle market inefficiencies and create further value for themselves and their shareholders.