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Can a Qualified Advisor More Effectively Position Your Business for the Sale?


9/26/13

by Michael Carter, Managing Director, Carter Morse & Mathias

If you’re selling your business, you might get a significantly higher price if you hire a qualified financial advisor, according to a recent study by Mercer Capital, a firm that specializes in business valuations.

“Pricing multiples received by those sellers who retained a transaction advisor were significantly higher than those who took the ‘for sale by owner’ approach,” according to the study.

That finding may go against the natural, perhaps genetic, instinct of self-starting, independent and successful entrepreneurs. Entrepreneurs and shareholders who are positioning their organizations for growth may likely consider conducting the sales transaction themselves –
thereby saving a transaction fee. Some entrepreneurs reason that there is no element, whether it is valuation, negotiation, positioning, or closing, that the entrepreneur has not done at one time or another.

However, selling a business is a life-altering, once-in-a-lifetime event. The seller will not get a second chance to earn the best possible valuation. Our experience suggests that shareholders realized valuation increases of three to 20 times our firm’s transaction fee.

Today, given the volatility of the capital markets, the problematic availability of credit, the increased regulatory environment, and, in general, the increased complexity of corporate mergers and acquisitions, the need for qualified investment bankers has become essential.

In addition to maximizing value for owners, “qualified” investment bankers reduce the time it takes to close a transaction, improve terms and conditions, and provide maximum flexibility going forward. The term qualified is essential because poor representation by unqualified advisors can cost significant time and money and hurt the company’s reputation.
 
Below is a summary of certain critical advantages of using a qualified investment banker:

  1. Options. Prior to undertaking any transaction, a qualified banker will help the owners clearly articulate their business and personal objectives and the strategic options to reach those goals. Having options is the key to any successful transaction. Options provide important leverage during the courting and negotiating phase of any transaction and increase the likelihood that a sale will meet the objectives of the company and its shareholders.
  2. Structuring Transactions. Structuring transactions is like chess; most of us know how to play but very few do it well. As with chess, the variables are extensive – including valuations, amount of capital to raise, pricing, value enhancements, earn-outs, guarantees, debt assumptions, seller financing, consulting contracts, carve-outs, hold-backs, and indemnification. A qualified banker is an expert in structuring transactions.
  3. Knowledge of the Capital Markets. Timing of when to sell is critical. If one starts reading about peaks and valleys in the popular press, it is too late. In the current market where capital is tight, it is even more important to understand who the buyers are that will pay a premium for your company.
  4. Real World Valuations. Most entrepreneurs don’t know the value of their business. Because buyers and investors do not want to waste time, they often get straight to the question: “What is the valuation?” A qualified banker must understand how these investors and acquirers will value a company and how to justify a premium valuation based on strategic value.
  5. Planning. In anticipation of a strategic transaction, investment bankers often play a critical role in preparing owners. Routine planning activities include detailed analysis of sales and marketing, finance, operations, and legal and product development. It is highly unusual to meet an owner who has properly prepared for a strategic transaction such as raising capital or selling the business. Planning activities include cleaning up legal contracts, cementing essential relationships, filling in management holes, and solidifying financing. This process can take anywhere from one month to one year, depending on a company’s state of affairs prior to a transaction. Proper planning, under the guidance of the investment banker can avoid a “busted deal” because of failed due diligence.
  6. Presentations. A qualified investment banker will prepare a careful written presentation of the seller/issuer, presenting his client in optimal, yet realistic terms. Additionally, he will always prepare his client for the formal (and informal) personal presentations. Meetings with acquirers and financing sources are critical venues for the parties to get to know one another.
  7. Saves Time. A “typical” corporate finance assignment takes well over 1,000 hours. Owners and their CFOs, consumed with running their businesses, simply do not have the time to focus on a strategic capital raise or an M&A transaction. More importantly, the process needs a dedicated effort where someone has made the transaction their top priority.
  8. Relationships. As a rule of thumb, private equity firms will close one transaction for every hundred situations they initially review. The process of seeking capital is as much about time as expertise. Key to saving time is to leverage the investment banker’s reputation and relationships. Qualified investment bankers have solid deal flow; they know sources of capital that rely on them for initial screening; they have deep relationships and can access decision makers quickly.
  9. Negotiating Ability. Entrepreneurs, however skilled as negotiators, are at a distinct disadvantage when selling or raising capital for two fundamental reasons. First, their experience in this type of transaction is usually limited or non-existent, while buyers, investors and lenders make a living negotiating strategic transactions. Second, when it comes time to sell a business, the person who created the company is likely to have strong feelings or personal issues relating to the sale. It can be difficult to be objective at the negotiating table.
  10. Quality Advice. Accountants are experts in audits and taxes, lawyers are skilled in securities law and legal structure, and commercial bankers specialize in granting senior debt. They are often trusted advisors for companies and their families, but they are not specialists in corporate finance. If a company is considering using their accountant or lawyer instead of a qualified investment banker, ask the following questions:
     
  • What do they know about the most current financing instruments?
  • Can they determine which financial structure provides maximum flexibility?
  • Do they have sufficient market knowledge to negotiate the best transaction?
  • Can they understand, interpret, adjust, and articulate financial statements?
  • Can they construct a financial model to determine the optimum capital structure?
  • Do they know which private equity firms or strategic acquirers specialize in the company’s industry?
  • Can they determine and rationalize the true value of the company?
  • Do they have an international reach to find buyers outside the U.S.?
     

If an owner hesitates or answers “no” to any of the above, engaging an investment banker should be considered.

The introduction of an investment banker gives a transaction more credibility.. Often, the price improves by the mere presence of an investment banker. In summary, the engagement of a qualified investment banker levels the playing field, which is otherwise inherently stacked against the business owner.


Contact:

For more information, please visit the Carter Morse & Mathias website, CohnReznick’s Private Equity and Venture Capital website.

 


About Carter Morse & Mathias
Carter Morse & Mathias is an independent investment bank that provides the highest quality financial advisory services for outstanding closely held middle-market companies. We provide a full range of investment banking services to assist our clients with business sales and divestitures, equity and debt capital raises, strategic acquisitions and financial advisory.

For more than 25 years, our professionals have helped hundreds of business owners conceive, plan, execute, and close transactions that maximize shareholder value. For more information, visit www.cartermorse.com.


This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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