When an entrepreneur decides to sell their business, it’s usually a bad idea to jump into M&A (mergers and acquisitions) without the help of a knowledgeable, experienced mergers and acquisitions advisory firm. A business owner can prepare for the sale process by retaining an advisor, and as long as that person is qualified for the job, the ROI is often high. The difficulty of selling a business while trying to run it, and the disadvantages of going through the M&A process and leaving empty-handed, are some of the biggest reasons to hire an advisor. Read on to learn more about advisors’ fee structures, the vetting process, and role in business sales.
Fees For M&A Advisors
An advisor typically sees their biggest payout when a deal is closed. Known as a success fee, this payout is often based on the transaction’s final price. Success fees are usually negotiated by the advisor and the business owner when the relationship is formalized. If the contract calls for a percentage of the sale price, the advisor is motivated to maximize the transaction’s value for the business owner. Along with success fees, many established M&A advisors require upfront or monthly retainer fees, which assure the seller’s commitment to the process. CGK Business Sales does not charge retainer fees. We are only paid upon the sale of the business.
Vetting a Mergers and Acquisitions Advisor
Business owners should carefully examine a potential advisor’s competence, experience, and reputation before signing a letter of engagement. Sellers should look for a positive history of past deals, testimonials from past clients, and endorsements from other industry professionals. When advisors have worked in similar industries, they may be more acquainted with potential buyers.
The Advisor’s Role in Preparing a Company for Sale
A considerable amount of work goes into preparing the target market before a sales pitch is made, and adequate financial information is crucial. Many mergers and acquisitions advisory experts will insist that their clients have the company’s financial statements adjusted and reviewed by a CPA if the owner does their own accounting. All advisors want to ensure that potential buyers understand how much Seller’s Discretionary Earnings (SDE) the business produces each year. This type of analysis goes beyond just seeing how balance sheets are connected to their income statements. Beyond financial information, an M&A advisor should ensure that physical locations are properly maintained. Post closing, getting key suppliers and customers on board is another important task, as potential buyers will want some level of assurance that current customers will stay as the company changes hands.
Getting the Company to Market
During the most prominent part of the process, the mergers and acquisitions advisory firm puts the company “on the market” and chooses a method that maximizes the seller’s chances of success. In many cases, this involves contacting potential buyers to gauge their interest. Advisors should manage the process efficiently by qualifying buyers based on seriousness, expertise, and available capital. Depending on the target company’s time requirements and other features, an advisor may decide to market the business to a limited number of potential buyers at one time. No two companies are the same, and an expert advisor will treat every sale differently.
Finalizing the Deal
Finally, selling clients should be confident that an M&A advisor can help them negotiate terms, including structures, escrows, tipping baskets, seller financing, reserves, and other important issues. If contingent payments, non-compete clauses, or consulting contracts are needed, an advisor can help a seller formalize these components with the help of an attorney, as well.