“Will I be glad I selected this M&A advisor?” “Will this advisor’s M&A process get me the results I have in mind?” “What do you expect from your M&A advisor?”
I suspect you go through these mental gyrations when considering whether you are ready for an M&A transaction and what to expect from your M&A advisor.
Mergers and Acquisitions is an exciting topic for both buyers and sellers. M&A creates a lot of potential for significant growth – both top and bottom line. Mergers & Acquisitions, properly managed, captures value by realizing synergies from well aligned organizations and technologies. From either the buy-side or the sell-side experience, creativity, financial and management acumen are critical to maximize value in a transaction. Inexperienced sellers and buyers need the insight, finance, business valuation, CIM writing and negotiating skills of a qualified M&A advisor to maximize value. Want to know what to expect from your M&A advisor?
What to Expect from your M&A Advisor
Your M&A advisor must pay for themselves. Period.
Easier said than done. Your M&A advisor will pay for themselves by connecting a well positioned seller with the best buyer to achieve strong fit and maximum value. The worst outcome you can have is making an uninformed decision. It’s a terrible feeling wondering if you left value on the table. It’s entirely avoidable. We’ll get to all of the factors that play into leveraging an M&A advisor to get the best deal closed at maximum value.
No matter which side of the transaction you are on, understanding the other side will improve your productivity and chances for success. M&A transactions are complicated. Most attempts at M&A deals fail.
Why position a seller really well to go to market? What characteristics make the best buyer? These two variables are inherently dependent. We’ll focus on identifying the characteristics of a well positioned seller and those of its best buyer. Then we can measure how well a buyer and its target of choice measure up to capture synergies and maximize value. Doing this well, relying on analytics, not feelings, is what to expect from your Mergers and Acquisitions advisor.
Both the buy and sell-side share a common overall process: scouring an industry to find the right partner. But the process is markedly different from buy-side to sell-side.
Well positioned seller
What does it mean to be a well positioned seller? A lot.
For starters I’d like to point out that we can measure how well positioned any company is when considering a sale. It’s not a matter of whether the owner feels that its time, but a matter of whether both the owner and the business are ready at the same time. What this means is that the company has strong product/market fit, finance/market fit and organization/market fit. At the same time the owner’s motivation to sell has to be legitimate. The issue here is that perfect alignment is impossible.
Measuring each of the market fit attributes is different for every business. And there are tons of metrics, key performance indicators and financial ratios to choose from. Take a look at how to uncover cash flow killers with these 4 processes.
The conventional sell-side M&A process has been tried and tested with established components, steps and benchmarks. That’s what makes it effective. Anything short will render it ineffective: clearly a bad idea if you want to succeed.
First impressions are extremely important. First, your business has to look like its a viable competitor. Your brand value has to be clear, relevant and current. Check out Alignment Media‘s advice on upping your brand value and market reputation.
Buyers will appreciate your attention to detail. It’s worth paying up for a high performing company.
This is the first checkpoint you should expect from your M&A advisor. A thoughtful discussion about your company’s history, products and services, technology, people and financial results. Understanding and conveying future prospects for your sale depends on a clear understanding of what got you to this point. When we see room for improvement, that becomes our advice: improve your business before you go to market. Otherwise you will leave value on the table. I recommend assessing performance weakness with an Alignment Map.
Naturally you will both sign a non-disclosure, or confidentiality agreement before your thoughtful discussion.
Following a thoughtful discussion about your company’s history and your motivation to sell, M&A advisors will request copies of your historical financial statements (typically 3 years and trailing twelve months “TTM”). We do this so we can get a clear picture of your revenue momentum and earnings trend. The two most fundamental value drivers are sustainable revenue growth and quality of earnings. We want to understand what range of options and valuation the market will support for your company.
We do this by preparing a pitch deck, or pitch book. Our pitch deck is a presentation where we provide you with recommendations to maximize your enterprise value in a sale and why you should select us as your M&A advisor. It’s our sales pitch.
Naturally M&A advisors that don’t prepare a customized pitch deck for you should be disqualified at this step.
As I just mentioned, a pitch deck is the opportunity for an M&A advisor to demonstrate how they differentiate themselves from others to maximize your enterprise value in a sale. So it’s a pretty important step you should expect from your M&A advisor.
A pitch book should be clear, insightful, interesting, data driven and conclusive on two things. First, what are the indications that now is a good time to sell. Second, what are the indicators the enterprise value you should expect to achieve given internal and external conditions. Obviously, this presentation could be quite extensive, and usually is.
Pitch books typically contain sections on the merits of the transaction; analysis of potential buyers or sellers; pricing and valuation information; as well as key risks to mitigate. Typically a pitch deck will have the following contents:
- Situation Overview: A snapshot of your business and any key highlights driving the transaction rationale
- About Us: A snapshot of the M&A advisor’s capabilities and experience
- Case Studies: Similar recent successful transactions and highlights that indicate relevance to buyer characteristics and business valuation
- Background and Context: Updates on the industry as a whole and recent deal activity in the sector
- Positioning: How your M&A advisor would position your company and make it attractive to potential buyers within expected value range
- Recommendations & Next Steps: Type of sale process (Broad, Targeted, etc.), document preparation and timeline
The M&A advisor’s pitch will clarify which one is best for you.
Keep your Pitch Decks
Another reason this document is such an important piece of the big picture? It sets the record for the remainder of the process. It establishes expectations, points to your business valuation range and may even include the name of the buyer. I can’t put a number on all of the times I’ve asked sell-side clients, when reviewing offers, to take out the pitch deck, turn to the valuation page and compare the numbers to the indications of interest we just received.
Guard your pitch decks until you get a deal done. If you run a sell-side process and don’t get a deal done, keep the pitch decks. They will remain valuable.
Back to the sequence. Once you have interviewed at least three M&A advisors and have selected one to represent you, they will provide an engagement letter.
Like all agreements, the engagement agreement defines the terms and conditions and the responsibilities of each side. It serves to set parameters around who is going to do what. It should provide you with the level of comfort that your M&A advisor will prepare the best documentation possible, identity the most relevant prospective buyers, run a thorough and timely process and deliver results – bona fide offers with valuation and terms.
Typical terms you will see in the engagement agreement include:
- Exclusivity – no reasonable M&A advisor will compete to sell your business
- Term – usually 12 months
- Fees – Typically a combination of upfront retainer and success fee (these vary based on valuation)
- Documents – Confidential Information Memorandum (CIM), Teaser, Buyer List and Process Letter
- Tail – if the term of the engagement runs out without a sale, you will still have to pay the success fee within a specified time if you sell to one of the buyers in the advisor’s process
If they are asking for anything outside of these typical terms, you may want a backup plan. Request two or three of the pitching firms to submit engagement agreements. When you get the agreement signed you are ready for the sale process to begin.
And your M&A advisor is ready to start the sale process. A thorough, well run sale process will gradually involve documentation including:
- Financial Model – Historical and Projected Financial Statements with Management Discussion & Analysis and future assumptions
- Confidential Information Memorandum – the story of your business and rationale as to why it’s the best strategic alternative for the right buyer
- Teaser – one or two sided high level, confidential (no names) snapshot of your company
- Confidentiality (CA), or Non-Disclosure (NDA) Agreement – typical terms about sharing and accepting confidential company information, and keeping it confidential
- Process Letter – a cover letter accompanying the Teaser and CA with the process steps and timeline buyers should follow
- Buyer List – a well researched list of prospective buyers for your company
- Management Presentation – a presentation that updates prospective buyers as to the state of business affairs since the date of the CIM to be used at buyer visits
It shouldn’t take more than three months to prepare the documents, with the exception of the Management Presentation which comes later. You will be asked to approve all of the documents prior to going “live” and marketing, or shopping your company.
The process of marketing your company to the approved buyers on your buyer list involves sending each one (usually the CEO) the Process Letter, Teaser and CA/NDA with a Call-To-Action (CTA): sign the CA/NDA to request the Confidential Information Memorandum.
The Process Letter will contain a timeline and request that CA/NDAs are received by a specified date. It will also specify when Indications of Interest (or Term Sheets) are due and what they should contain (approach to valuation, structure, etc.). The CIM CTA is an indication of interest. This is the sequence to expect from your M&A advisor.
The hard part is getting the timeline just right. Push deadlines too far out, you may lose interest. Set tight deadlines, you may alienate otherwise viable buyers. Let the M&A marketing process run you and you have popcorn. That’s right, popcorn. Popcorn is random, you have no idea which kernel will pop next and if it happens to your M&A marketing process all bets are off. No serious, synergistic buyer is just going to wander into your process. All buyers should be led through the process with a clear understanding why you believe they are the best buyer for the acquisition target. Remember, this is done by writing a really clear Confidential Information Memorandum that emphasizes the value realizing all synergies.
What to expect from your M&A advisor? Disciplined and deliberate focus on establishing an achievable marketing timeline, with achievable milestones, that encourages offers.
While every transaction takes on a life of its own, I aim for a two to three month period to get to indications of interest, or Term Sheets. Total timeline from start to offers: roughly six months.
At this stage we may expect requests for site visits from prospective buyers. It depends on the type of business, facilities requirements and so on. I encourage sellers to honor these requests – yes, even before we have received a Term Sheet – it may be the tipping factor whether we get an indication of interest from each respective buyer or not. We want offers, so do everything you can to encourage them. This is the meeting in which we use an up-to-date Management Presentation as the agenda. Yes, we want to push the seller’s agenda to emphasize opportunities, synergies and value.
Finally, when all of the Term Sheets have been received, we can compare them, apples to apples, and rank them from most favorable to least favorable. There will likely be more than simply valuation to consider when ranking.
Let’s take a look at the process from the buyer’s perspective. To recap, the pool of buyers has narrowed from the entire approved buyer list to those that have followed the proposed timetable your M&A advisor prepared, down to those that see enough potential for value creation and have submitted offers. These numbers vary greatly and may start with 50 to 70 (or more) total prospects, and result in three to four bona fide offers. It depends on the seller. The larger, more profitable the selling company, the more offers, within reason, we receive.
What do we know about the buyers at this point in the M&A process? We know they see value in the seller. We just don’t know what they are focused on, or how they value it. Again, it’s why we avoid popcorn – by getting all viable buyers at the (virtual) negotiation table at the same time we can truly run a silent auction that pits buyers against each other.
The M&A negotiation process is complicated and I don’t want to brush over it, but it’s an entirely different article that I’ll add soon (and link to here).
When you’ve negotiated your best deal with the best buyer, and agreed to a formal Letter of Intent, you will begin due diligence. What is due diligence? Due diligence is the process whereby the buyer will analyze all of your data to confirm all of their expectations (everything you’ve told them during the sale process) is valid. There will be valuation adjustments based on this process.
Due diligence requires the preparation of a data room, a single place where all of your documents reside so they can be reviewed by appropriate counsel, accountants, etc. Today, virtual data rooms are prominent, enabling easy web access saving time and money.
Buy-Side M&A Process
Getting to exclusivity and due diligence has been expensive for the buyer.
Let’s take a step back and discuss a buy-side M&A process and what to expect from your M&A advisor as a buyer. Buy-side management is significantly more work for an M&A advisor than sell-side work. The buy-side M&A process involves scouring an industry for attractive acquisition targets of choice. It requires an ongoing process with the following steps:
- Define the Target Market – clarify the criteria that you are interested in acquiring
- Build a Target Database – identify each company and contact that meets your target market criteria
- Acquisition Approach – warming up prospective targets
- Target Evaluation – preparing a reasonable information request that each target is willing to provide (remember, if a target doesn’t have a sell-side M&A advisor, they probably won’t have a relevant CIM or equivalent)
- Target Qualification – preparing as close to a CIM with an accurate enterprise valuation for each target
- Indication of Interest – preparing a Term Sheet to start the negotiation process
- Negotiation – the back and forth of value and structure terms
- Due Diligence – access to the data room and processing data verification
- Closing and Funding – preparing and signing the Purchase / Sale Agreement and transferring funds.
You can now see, from a high level, what each side of a transaction must do to get to a deal. Every step is complicated for each side and agreeing on value is the most challenging component. Having realistic expectations, a firm understanding of what affects valuation and attractive alternatives are the most valuable elements of making informed decisions.
And we haven’t even mentioned M&A integration. Check back soon and I’ll have an article on how preparation can simplify the post transaction M&A integration process.