Let me just come out and say, I didn’t hire an advisor, but in hindsight it was probably one of the worst mistakes I made! Yes, knowing what I know now, I would have done it differently. Why didn’t I engage an advisor? I didn’t want to pay out any more of my proceeds and I was already paying a good chunk in legal fees. It is what most sellers think! I just wasn’t willing to pay out the typical $100k – $125K in success fees that most M&A advisors require. But here is the reality; I could probably have negotiated a lesser fee (after all, I already had a great buyer) and I would have probably gotten more for my company, net of any M&A fees. (In both my first and second company divestitures, I didn’t use an advisor, but more on the first one later.)
I have now completed a few transactions for sellers who came to me with a buyer in hand. In each case, I offered my services for less that what I would normally charge, because they did already have a strong buyer ready to engage in a transaction. And secondly, the offer the seller received was very competitive in terms of multiples and earnout structure. In each case however, I was able to assist in negotiating more for the company, than the original offer – way beyond my fees. (Be sure to read my post on M&A fees.)
Here is how an advisor can help, even if you have already identified the seller:
- If the offer you have received is reasonable, given your revenue, industry, and net income, and assuming the Letter of Intent (LOI) hasn’t been signed yet, your advisor will most likely negotiate better terms for you, as they know what the industry multiples are for your size company.
- An advisor will perform some due-diligence on the buyer, including requesting proof of funds – something you will always want prior to signing the LOI. Many sellers feel awkward about asking for financials or proof of funds.
- Your advisor will have all the “difficult” conversations around earnouts, hold-backs, escrow amounts and reasonable non-compete terms. The seller can stay removed and keep the positive vibes going. Sellers don’t want to personally have those uncomfortable conversations if they end up working for the buyer.
- An advisor allows you to continue to keep the momentum going with the company and not be bogged down in deal discussions. This is so key, especially if you are a smaller organization or you are personally involved (even at a high level) in running sales or deliverables. So many sellers get side-tracked once an offer is received and deals then fall apart because projections are not met.
- Keeps the deal momentum going. Your advisor should be scheduling weekly calls and making sure momentum continues by all parties (buyer, seller and legal counselors).
- Your advisor may suggest legal counsel that has solid M&A experience in your industry if you don’t already have an attorney in mind. Remember, your attorney that created all your engagement letters usually doesn’t have the experience in M&A transactions.
- Provides an independent look at your financials and uncovers additional EBITDA adjustments. Today with COVID expenses and PPP loans, these can get more complicated than they were in the past. Uncovering and quantifying realistic adjustments can add considerable money to the eventual proceeds. Most good advisors know where those hidden items can be found.
- Assists with Working Capital target amounts and bridging the gap between the accounting and reality of running the business.
- Assists in the negotiation of your future salary. Many owners (especially those with S-Corps) take the majority of their compensation out via distributions, showing a very small salary, which in most cases is below industry standards for their current or future position post-sale. An advisor will help you negotiate this for higher future salary.
A recent transaction with a pre-existing offer
Here are some real-life examples of the points above from a recent transaction in which I assisted the seller after a buyer had already offered up terms. First, I noted that the earnout had no upside. Meaning if the seller went beyond the stated revenue threshold (i.e., sales were greater than the anticipated earnout amount), there was no upside for the seller. Secondly, I noticed that if that seller missed their earnout target by just $1 dollar, they would lose 20% of the entire transaction value. We restructured this so it wasn’t an “all or nothing” term by including additional step-ups for earnout percentages. I also brought a strong M&A attorney into the transaction who understood well the tax ramifications of a Section 368(a)(1)(F) reorganization, and someone I knew who could focus on the important issues and get the deal done in 45 days. Not a small task. And finally, the buyers had a number of hold-backs or escrows they wanted to maintain for sales tax, PPP loans and other items. However, these amounts were too excessive. I managed to get these scaled back or removed entirely. While that wasn’t an increase in purchase price, it was more immediate cash in the seller’s pocket.
When you don’t need an advisor
It would be an unrealistic view on deals if I didn’t mention that there ARE times when you don’t need a M&A advisor. First when you are selling to your employees or other shareholders. This was my situation in my first company sale. I was selling to my partner and it would have been awkward to seek an outside advisor in addition to my attorney. But that doesn’t mean I didn’t do my research and talk to friends in the industry to get an idea of the company valuation in terms of EBITDA multiples. If we were larger, I would have recommended that we actually have a formal valuation completed. If you are smaller (under $3M in revenue,) that may be a cost you have to bear if your shareholder or partner doesn’t want to incur the expense. Either way, you need to do your research and know what the multiples are for your business.
I would also forgo an advisor if you have a strong working relationship with the buyer. Maybe you have done work together in the past and you have a high level of trust and understanding of each other and each other’s business. The sales agreement you create should be where you spend your money. Again, assuming you both are comfortable with a sales price and terms.
In each of the situations above, I recommend taking my Value Maximizer Assessment if you are a MSP, VAR, ISP, CSP, or custom developer. This at least will give you an idea of your potential value.
What if you already signed the LOI?
A LOI usually has all the major aspects of the deal already spelled out, including a no-shop period, where you cannot entertain other buyers (or maybe not). Depending on how well the LOI is written there may be an opportunity to have a new one presented if both the buyer and seller agree that it is missing major items. Even if not, you may still benefit from the use of an advisor to help you work through the purchase agreement, non-compete and other agreements.
Finally, is the buyer going to be happy that you have all of a sudden engaged an advisor? Probably not. But as I was told in my last transaction, the buyer found me to be helpful in keeping the transaction rolling, tough in my negotiations, but fair in the end. And that’s really what you want in the person you hire to represent you.
Remember, this is probably the most important transaction of your life, and not one that you will want to regret later because you feel like you didn’t get the best deal or best advice possible. And just like any transaction, everything is negotiable. So, reach out to an advisor and see what you can negotiate–you might be surprised!