In mid-2014 I was certain: Now is the right time to sell my first company, Absolventa. In the recent past I had had a few conversations during which I often heard the sentence “You have built a cool company. If you want to sell, let me know“. There was no concrete offer yet, but I had the feeling that a nice exit would be possible.
In the group of shareholders, we came to the unanimous decision to start a sales process.
“Thanks to M&A advisors, two buyers have bid a high price.”
Since I had no experience of selling a company at the time, I decided to hire an M&A advisor. My task was: show me potential buyers I didn’t know before, and help me to create a bidding competition in a structured process that would lead to the highest possible sales price. This clear assignment worked well for me: In the end, two buyers bid a high price who I wouldn’t have had on my radar myself.
Nowadays, I have more experience and even supported business friends as a consultant in selling their company. In this way, I was able to slip into the role of an M&A advisor myself.
Today at FLEX Capital I experience from a third perspective what distinguishes good M&A advisors: Either they show us interesting companies that are for sale or we mandate them to sell our portfolio companies.
The basic competence of M&A advisors
M&A advisors can provide useful support in various tasks in the sales process. Not every consultant has the same competence in every area. Therefore, founders should consider which profile a consultant should bring.
How M&A advisors support
The range of services offered by the consultants ranges from simple supporting activities to accompanying complex negotiations. Here is a brief overview:
- Development of the equity story
- Preparation of the sales documents
- Preparation of the data room
- Identifying and addressing potential buyers
- Setting up the sales process
- Viewing and evaluating the incoming offers
- Support in negotiating offers
- Consultant and sparring partner during the sales process
Management teams that have bootstrapped their company, have never drawn up a real business plan and have no experience in contacting investors need another M&A advisors than founding teams who have already carried out three financing rounds. In the first case, the counselors have to provide hands-on support with the basics. In the second case, well-prepared business documents are usually in the drawer and the managers are used to presenting their company.
In my experience, every M&A advisor is able to put together sales documents, create a business plan and prepare a data room. Everyone knows the basic tools, but there are competencies in which the consultants differ.
What first-class experts offer
In my experience, entrepreneurs who expect more from their advisor than the basic program should keep an eye on the following topics:
- Relevant deal track record: Has the consultant already accompanied sales in the respective industry? Does he or she know the buyer and what is important to them? Is he or she familiar with trends in the industry?
- International footprint: If entrepreneurs want to include foreign bidders, the consultant should have international experience and, above all, contacts. A first step is for M&A advisors to provide evidence of a cooperation with a US M&A boutique. It is even better if the consultant is part of a global team that works on a joint profit and loss account so that international partners have a self-interest in closing the German deal successfully. However, an international footprint is not central to every deal: A smaller German company with national business may be better advised with a consultant who specializes in the German market.
- Powerful organization: Small M&A boutiques are not bad per se. However, they must have sufficient resources to manage different bidders even under time pressure. If several due diligence processes run in parallel, there is a risk of delays in boutiques that are too small, which in the worst case can lead to investors jumping off.
- Good work ethic: M&A is a stressful business with a nine-to-five mentality rarely achieving success. Consultants have to be ready to go the extra mile for their clients.
- Trustworthy sales person: Before giving a mandate, entrepreneurs should ask who the adviser will be and get to know them. Sometimes consultants act like insurance brokers – and thus scare off potential buyers. A good advisor knows the prospect’s M&A agenda and can communicate with him or her on an equal footing.
Two factors are by far the most important
Which criteria are most important for entrepreneurs in practice? I made a survey about this in my LinkedIn network. With 29 participants across different groups, the answers are not representative, but their clarity is interesting: 41 percent named a relevant track record as the most important criterion for choosing a consultant, followed by an established personal relationship (38 percent). Recommendations play a subordinate role at 17 percent. The fee structure is far behind in last place.
The results overlap with my assessment. Anyone who has known his or her advisor for a long time can easily assess the level of work ethic, whether the discussions are taking place on an equal footing and how the company is structured. And if the consultant has already closed relevant deals, he or she knows the respective market and his or her buyers will then be able to structure your sales process successfully.
One more word about costs: Yes, good consultants are not cheap, but in my experience they are worth the money. It is not worthwhile to push fees to the limit of pain. In case of doubt, this means that your deal has less priority than the other current mandates.
Instead, think about fee models that offer consultants incentives in order to overperform. In this way, everyone involved is motivated to quickly achieve a lucrative sale. In any case, you should be skeptical if the price structure of consultants is significantly below the usual market level or if consultants let themselves be massively bargained down in price. Because the saying applies: “Pay peanuts, get monkeys.”
Early talks, lucrative exits
For entrepreneurs, there are many reasons to choose the support of an M&A advisor. In order for the investment to pay off, founders should take the time to make a selection. In the best-case scenario, you will build relationships with potentially suitable consultants at an early stage.
Renowned consultants often approach companies that are relevant to them themselves at an early stage. You should respond to these offers, even if your company is still too small to exit. You will find out what is currently going on in your industry in terms of M&A, what the current valuation levels are and what buyers value. All this information will help you as the CEO to plan the further strategic direction of your company in order to have a really successful exit in two or three years.