The Value of Professional Merger and Acquisition Guidance

By Generational Equity

02/13/2017

As we discussed last Friday, The M&A Advisor, a leading mergers and acquisitions trade organization, along with Katz, Sapper & Miller, a CPA firm, conducted a survey of experienced M&A professionals.

The aim of the study was to delve into trends and developments impacting M&A deal making in 2016 and how those issues might impact 2017. The survey results and accompanying interviews provide real insight into current M&A trends.

On Friday, we looked at some of the challenges professional buyers are facing today in closing deals. Today we are going to examine the value that investment banking firms and M&A advisors, like the Generational Group, bring to the table.

According to Amy Margolis, principal at a private equity firm:

[W]hen working with a seller who has not hired an outside advisor, it can be particularly challenging to manage ‘the expectations, getting them to the table, getting them comfortable that we do want them to stay on, or whatever their reservations are … seller’s remorse is always something to consider. At the end, they feel this has been their baby. This is a company that they’ve had in their family. They don’t have someone potentially to take over. Can they really let go? … That’s one of the biggest challenges we face if we are pursuing a business owner who has not hired an experienced M&A advisor.’

This is a theme that we touched on Friday, and it is abundantly clear if you review the entire study that it is a major issue buyers encounter regularly where the seller is not using an M&A firm. Simply put, an experienced dealmaker will ensure that the client is truly ready to talk to buyers before even entering the market. A professional dealmaker works with hundreds of buyers every year and has a reputation in the market that needs to be maintained. For that reason, a dealmaker will spend time with his or her client to clearly determine the financial needs that the seller has and, most importantly, where the individual is psychologically in relation to departing the company.

Business Enterprise Value

Another key facet that an M&A firm brings to its clients is the ability to educate them on the market value of the business. This is also a huge challenge for professional buyers that are working with sellers who do not have professional representation. Here is how the study by the M&A Advisor described it:

Hand-in-hand with the issue of buyer remorse is the challenge that comes with the valuation of the company by the buyer. “Sellers see larger companies that are getting these crazy valuations and feel, ‘My Company is just as good as theirs. That’s my expectation.’” The advisor’s challenge is to help sellers understand why their company may be different from a larger company in the same industry and why they may not get the same valuation.

One of the keys to the Generational Group’s success has always been its valuation team (in fact, we won Valuation Firm of the Year in 2015). Before we take any client to market, we conduct a thorough, detailed, in-depth evaluation on the client’s firm. We do this for two equally important reasons:

1. To give the seller a realistic expectation regarding current market value
2. If the value is below the client’s financial needs/expectations, then value building strategies are provided to improve the company’s value over time

Obviously, not every privately held company is adequately prepared for buyer scrutiny the moment we conclude our evaluation. Most in fact have areas that need attention to make the business far more buyer ready. The two dozen metrics that we look at are designed to help an owner improve the realistic value opinion we have over a three-year to five-year timeframe.

This is the great news about working with the Generational Group of companies: we establish relationships with our clients that are long-lasting. In fact, we provide two updates of value (after the initial valuation) at no additional cost over a five-year window. In partnering with an owner, our goal is to help them build a company the optimal way in order to gradually improve the business value.

Again, from a buyer’s perspective, having a seller with an M&A advisor in tow is far more optimal than the opposite. Even if the investment bank drives the value up, it is in many cases far more beneficial to the buyer to pay a bit more simply to ensure that the deal does close.

I hope that you have found these concepts from a buyer’s perspective to be helpful. The more you as a business owner can get inside the mindset of a buyer, the better off you will be when you present your company to them. This educational component is what we emphasize heavily in the executive exit planning conferences that we hold. Our professionals have one goal in mind: at the end of the meeting we want our conference attendees to be thinking more like buyers than sellers and to use that mindset to grow their businesses.

If you are interested in learning more about how you can build a buyer ready business in today’s market, you should set aside a day and attend one of our meetings. To learn more, call us at 972-232-1121 or visit our website and provide us with your contact information.

By Carl Doerksen,  Director of Corporate Development at Generational Equity.

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