Selecting the right M&A Advisor 1 can make the difference between a great sale and a waste of time. More than one technology partner has shared stories with me of not selecting their advisor wisely. And in most cases, their revenue took a downward fall as they were fully occupied on the wrong deal or constantly updating quarterly financials and projections while waiting patiently for their advisor to bring them qualified buyers. In some instances, no qualified buyers ever emerged because their M&A advisor did not have the appropriate list of buyers to solicit. Even in a great economy, this can become a detriment to the seller.
Select an advisor with whom you are professionally “comfortable” as you will be working together extensively for several months. This doesn’t mean you pick the person you “like” the most. You are not going to hang out and have beers together – at least not until the end, when there is something to celebrate! “Like” is important but doesn’t get a deal done. Competency trumps “like,” so look for someone who not only has the personal chemistry, but someone who knows the industry, is also numbers savvy and is comfortable around legal teams. Nothing is more embarrassing than having the attorneys and buyers talk over the head of your advisor.
Obviously, trust is a key factor, and, in most cases, you will have to `trust your gut’ on this, even after checking seller references. When checking references, also ask about responsiveness and their availability throughout the process. Your advisor should be there for you 24/7. After all, you will be thinking about a pending sale 24/7 and so should they. If they are not quick to respond while going through the selection process, chances are they won’t be quick to respond later either.
Big and medium-sized firms tend to roll out the managing partners at the first meeting and then get the junior or less-experienced staff members to do most of the work. Know the entire team that will be working on your engagement upfront and the role each person will play in your engagement, specifically who will be speaking initially with interested buyers. Make sure that everyone on the team can articulate your value proposition, thoroughly understands your business, knows how you are different from your competitors and finally what makes your company unique to a buyer.
This is not a time to pick a friend who happens to be an M&A advisor in another industry. I would even say that a general “technology” advisor also may not understand the particulars of a channel partner or IT business or even who the buyers are (both financial and strategic) in this area of specialty. There are buyers specifically looking for Microsoft, SalesForce, NetSuite, or A.I. partners, etc. Other buyers are seeking specifically for MSP or ISVs. Find an advisor that knows your buyers well and not just someone who has an extensive list they procured from some website they subscribe to, that they then use to email blast out your company information. I affectionately refer to this as the “spray and pray” method. Most emails are never opened, those that do may not be qualified, or know anything about your business. And it may very likely end up in the hands of your competitors.
There are all sizes of M&A firms. Just because you listen to multiple webinars with a large firm who can speak to your industry doesn’t mean they are the best fit. Also, selecting a firm that has a broad range of clients they service, say $1M – $250M, means they are not going to be all that engaged if you are less than $10M in revenue. Conversely, picking a firm that has never done a transaction larger than $25M may also not be a good fit if you are much larger.
Per the recent 2018 – 2019 M&A Fee Guide published by Divestopia, 77 percent of M&A advisors work on less than 10 deals per year and are defined as boutique firms. Of this group, 61.4 percent work on deals with a minimum transaction value of less than $5M. If your revenue is in the $3M – $25M range, picking a boutique firm will be your best option. You will get much better service and attention to your deal. If your revenue is below $3M, be sure they have engaged and sold companies in that range, otherwise you may not “feel the love” because you are just too small.
Acquisitions over $35M typically have more people involved both on the buy and sell side. Deals over $50M should involve brokers with certifications offered by the International Business Brokers Association (IBBA) or other state broker associations. A $50M deal may not require the credentialing, but the larger the transaction, usually the more complex the negotiation and terms. Credentialing as mentioned above via a Certified Business Intermediary (CBI) certification gives you at least peace of mind that the advisor knows what they are doing. In general, it is good to avoid being either on the low end or the high end of the range of an M&A firm’s transactions.
Determining your Go-to-Market price
Your advisor should have a solid understanding of the typical EBITDA multiples for a company of your size and particular designation (i.e. VAR, MSP, ISV, SI, etc). They should also be focused on your amount of recurring revenue and be able to make the distinction between vendor maintenance renewals and your own company maintenance plans or cloud offerings. If they don’t provide formal valuation services then they should at a minimum run your company through a generic valuation tool or the Value Maximizer Assessment™ by RoseBiz to help determine your strengths and weakness and then apply the current industry multiples against those results. Otherwise, how will you know what to price your company for when buyers present themselves?
The best advisors will tie their success fees to an actual range of your company value. Entering the market without a clear and supportable company value and hoping for potential buyers to determine your value very likely may result in a less than optimal offer, since your advisor cannot articulate why you might be worth more. This puts the buyers in the driver’s seat when you should be the one in the driver’s seat – this is your company! Taking your revenue or EBITDA multiple and applying the last or average multiple on the deals they closed is not a way to determine your company value. Afterall, your company is unique. They must look at your management team, your customer retention, your mix of revenue and customer dispersion, and growth rates, among other things, to truly assign a proper value.
Sample Interview Questions
Most sellers have only one opportunity to sell a company in their lifetime, so you need to make sure you are performing sufficient due diligence on the advisor you are selecting. When interviewing an advisor, consider questions around the team that will be working with you. The extent and degree of their marketing efforts, their knowledge of your channel, and how fees are calculated and earned are all important. Consider asking the following questions:
- Who will be working on the engagement? Roles?
- What credentials/certifications does the advisor hold, if any?
- How many transactions have they closed over the past 24 months in this industry?
- What was the range of revenue of the companies they represented? Largest, smallest?
- What were the range of multiples for companies similar to yours?
- Have they sold companies that you have heard of and are they willing to allow you to speak to those former owners as a reference?
- How many were unsuccessful and why?
- MORE IMPORTANTLY, can you speak to someone they represented and failed to sell?
- Are they willing to travel to meet you in person (the larger your revenue the more likely this will be granted)?
- Do they already have a list of buyers in mind, if so, how many?
- Of this list, what percentage of buyers do they anticipate will review your Confidential Information Memorandum (CIM) or Blind profile (i.e. what conversion rate do they expect)?
- How many buyers will they speak with on the phone vs. email?
- Do they know both strategic and financial buyers?
- How many of these are currently in the technology industry?
- What is their detailed marketing approach? What happens each week? How do they involve you in this process?
- What will they be preparing on your behalf? Do they have examples to show you?
- Is there a sample solicitation letter and/or seller profile they can share with you?
- How will a “do not market to” list be handled?
- What are the ramifications of accidentally marketing to someone on this list?
- Can they provide an example of the reporting you will receive on buyer contacts?
- What are the terms of the engagement: Is there a retainer? Is there a monthly fee? If so, how much?
- How is the success fee calculated and what are the percentages being used at different levels? Ask for an example calculation.
- What is their minimum success fee?
- Can the retainer or monthly fees offset the success fee? (This can be negotiated if not written into the agreement.)
- How are earn-outs and other deferred compensation handled in the success fee? Are they paid at close or as paid subsequently?
- If fees on earn-outs are paid at close, are they discounted at NPV?
- What is the tail period of the engagement – if you disengage, how long will you continue or on what terms are you obligated to continue to pay them a success fee?
- How are carve-outs handled (in other words, people who you have already approached in the past)?
- What happens if you sell to one of these carve-outs, are you still obligated to pay a fee?
A download of this checklist can be found at www.rosebizinc/resources
1 Most companies in the lower middle market (firms with annual revenue less than $250M) will use an M&A advisor instead of an investment banker who usually services larger private and publicly traded companies. A business broker works with smaller sellers who usually sell to individual buyers versus a corporation or private equity firm. Business brokers typically work with companies that sell for less than $2M. Unlike an M&A advisor or investment banker, a business broker does not consult extensively with the company owners to prepare them for sale, and usually performs not much more than listing them on a number of small business websites featuring companies for sale.