You’ve been considering selling your business for some time when you get that interesting email in your inbox:
“Dear Business owner:
I, Mr. Private Equity Principal/Mr. Strategic Corporate Development Professional have an interest in acquiring your business because we believe your product/services would synergistically enhance our current operations. Please let me know if you are free to discuss further.”
You do your research and the author of this email appears to be absolutely legitimate and capable of closing a potential M&A transaction with you. Should you deal directly with this potential acquirer or should you hire a business broker or investment banker to help guide you through the process?
While the answer to this question is ultimately left to each business owner to make there is a compelling argument for working with a professional. Below are a number of reasons explaining why hiring a business broker or investment banker to negotiate on your behalf can help you drive increased value and help ensure the transaction has a better chance of closing:
1. Creating a potential universe of buyers. There is a saying in the realm of mergers and acquisitions that one buyer is tantamount to no buyers at all. Sure, it’s great to have a legitimate interested party, but what if the deal dynamics aren’t there? What if there is a valuation gap? What if your one potential buyer decides they are no longer interested in pursuing your business?
A business broker or investment banker can help ensure against this type of “buyer concentration” by developing an extensive buyer universe to enable your business to be marketed to the best possible buyers. This includes extensive research using highly expensive databases to find the best strategic and private equity buyers that have been active or already have investments in your space.
Having multiple potential acquirers also creates an auction environment with multiple bidders driving up value to make sure your business is sold for the highest amount possible.
2. Presenting your business to the market. Nobody knows your business better than you, but be cognizant of the fact that your knowledge may not extend to presenting your business to potential buyers in the best possible light.
Investment bankers and business brokers are experienced at performing their version of pre due diligence to make sure any potential items that may deter a buyer in due diligence will be mitigated early on. As an example, maybe sales are down due to the loss of a major customer – an investment banker or business broker can help couch this data in a manner that honestly explains the situation and the go-forward prospects.
At the beginning of a sell-side assignment business brokers and investment bankers spend weeks crafting a Confidential Information Memorandum (CIM) that explains all the aspects of your business from products and services to supply chain, core competencies, biographies on key employees, organizational chart and more. This is the key selling document to really give potential buyers a sense of your company.
More importantly, an investment banker or business broker will work with you to recast your financial statements so that you can present EBITDA, the number in which the bulk of valuations are based on, is absolutely maximized. They’ll help you identify one-time expenses that can be added back to EBITDA along with other items like professional services, litigation and more.
3. Negotiations. Invariably every M&A transaction, no matter how smooth it may appear to be trudging along, will encounter some roadblock or hurdle that could derail the entire deal. It could be things like liabilities for environmental reports, negotiating holdbacks and indemnities or explaining how a certain revenue stream is accounted for.
In these cases, an experienced business broker or investment banker can draw upon prior deals and employ creative strategies and workarounds that best serve all parties. A creative approach to a seemingly daunting issue can be the difference between a deal closing or not closing. It can also be very critical in defending deal value.
4. Incentives. Business brokers and investment bankers align their interests with yours to make sure they are fighting for the exact same things that you are. During what can be lengthy and difficult negotiations they are a tireless advocate for your best interests because in most cases your best interests align with there’s.
So, while dealing direct with a potential acquirer who has contacted you on their own volition appears to be a quick an efficient way to get a deal done you may be leaving significant value on the table if you don’t market your business to the broadest set of best possible buyers. To do this you should think about hiring a business broker or investment banker. The fees you end up paying them when the deal closes will more than likely be well worth it.