The Sell-Side Advisor: An Extra Expense or a Critical Member of the Team?
As a business owner you have spent years, maybe even decades, growing your business. You have gained a wealth of knowledge that has allowed you to become an expert in your field and deliver results that keep your clients coming back for more. However, when the time comes to sell your company you may find yourself with more questions than answers. How do you go about preparing your business for sale; finding prospective buyers; valuing your business; managing the due diligence phase; preparing yourself and your team for the transition; and finally completing the sale? This is where the sell-side advisor comes into play. They will be a strategic part of your team and a member that you don’t want to forgo. However, before you commit resources to a sell-side advisor it would be wise to know what they will do for you and why they are even necessary.
The Sell-Side Advisor: Your Personal Expert
A sell-side advisor is an M&A professional that specializes in representing companies that are looking to be acquired. They are well-versed in the process from start to finish and should have a solid understanding of the current M&A landscape. A good advisor should have a plan that will attractively position the company to potential buyers and help maximize the valuation. The advisor will provide many services such as a pre-sale analysis, financial modeling, preparation of the marketing documents and CIM, management of the due-diligence process, and negotiations. At this point, some business owners may be thinking that this doesn’t sound too difficult and that they could manage on their own. While feasibly possible, it is not recommended. Advisors that have spent years honing their skills and that can bring experience from prior transactions are well worth the cost. As a business owner you don’t want to make selling your company a full-time job that will require a serious time commitment for education. Additionally, when you go to the negotiating table you want to be confident that you are in the best possible position. Just like you probably wouldn’t represent yourself in court, having a highly-skilled professional by your side in a transaction is very beneficial.
If your sale is considered a securities transaction by federal and state securities regulators, then an advisor that is a FINRA registered broker/dealer may be necessary.
In addition to managing the process from start to finish a good advisor will help optimize the value of your company and help you avoid common pitfalls. Common valuation metrics exist, such as multiples of EBITDA. However, each industry and even specific geographic regions have unique valuation techniques that your advisor will understand. As a seller, you don’t want to close your deal only to find that you left some cash on the table by using the wrong valuation technique. When it comes to common pitfalls, your advisor should be able to help analyze different forms of consideration used in the deal, earn-outs, and identify and reduce closing risks.
Questions for Your Sell-Side Advisor
Now that you have an understanding of what the sell-side advisor does and how they will help you achieve your goals, we should look at how to select an advisor. Not all M&A firms are created equal. Retaining an advisor can come with a variety of fees. It is important to trust that the firm you will be working with is able to deliver value. The following are a few good starter questions. Depending on your needs and industry you may have more or different questions.
1. Who will be assigned to my project? – You want to know who you will be working with and what prior experience they have selling companies. Will they be working with you exclusively or are they working multiple deals at once?
2. What is your sell-side process? – Before hiring a firm, you want to know that they have a battle tested process for completing your transaction. Ask about how the process is managed, how the firm will be held accountable, details from prior transactions, and an estimated timetable for completion.
3. How would you market my deal? – This question ties to #2 but is worth its own point. How will the firm market your deal? Will it be listed on an online platform; will they directly contact buyers in their network or will a great deal of phone calls need to be made?
4. Ask for references. – It is perfectly fine to ask for references. A good firm should have no problem providing a few names or client reference letters for you to review. If you have the opportunity to speak with a prior client, you can go through this same list of questions with them. How do their responses match those provided by the firm?
5. What are your fees? – What type of fees will be paid during the engagement and at close? Will you pay a monthly retainer? How will success fees be calculated? Will you be required to pay any other forms of compensation, cash or otherwise? Before signing any agreements be sure to have a solid understanding of how fees will be calculated and what you are getting into.
6. Firm specific questions. – It is acceptable to ask pointed questions when interviewing a firm for your sell-side transaction. Inquire as to how many deals the firm completes during the course of a year, their success rate, what transactions they have done in your industry, and any contacts they may have that are specific to your industry.
If possible, meet with the potential advisor for a face-to-face meeting before making a decision. You will be working closely with this person(s) for several months on one of the most important transactions in your company’s history. Having someone that is personable and that you get along with should not be discounted.
The Next Steps
Selling your business is not a process that you want to go at alone. You may be a talented business owner with a team of excellent operating advisors. However, retaining a professional that knows the ins and outs of conducting a transaction is well worth the investment. Selecting the right advisor will take time and is not a process that you should rush. Once you begin to think that a sale is the correct course of action you should begin your research. Ask professionals that you already trust, such as CPAs and lawyers, for introductions to competent firms. The process from selecting a sell-side advisor to closing will be long and will most likely not always be smooth. Always ask questions of your advisor and be sure you are in agreement on the best strategy for your company. Once the sale is complete you will look back and be glad that you worked with a professional and did not attempt this process alone.
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