Where do M&A advisors add value in helping business buyers with an acquisition of a company

What is this article about?

Both sellers and buyers have a different opinion on what is of value to them during a transaction. In the last blog article, I described the “added-value” of an advisor through the eyes of a seller. In this newsletter, I will describe the support of an M&A advisor from the point of view of a buyer.

The question of what value M&A advisors add in the eyes of a buyer of a company is an important one for us. It determines how our clients see and appreciate our daily work. This is different for each type of buyer. The answer depends, in my opinion, very much on the acquisition plan and experience of the buyer. Does it want to do an acquisition in one country only? Is it looking for a specific industry across Europe? How many targets exist in this market? Has the buyer acquired companies before?

We get requests from a large number of different buyers each year. Everyone has their own background, experience, and expectations. Often business buyers reach out to us with a request for one of the potential sellers we have listed on our website. Our objective is to show which sellers are active in the market. We are trying to make an overview of all active sellers in our core industries. For more details on these listings of sellers please visit: www.corporatefinanceineurope.eu/business-sale/companies-sale.htm

We think it is valuable to show which potential sellers are active in different markets such as IT, plastics, automotive, transportation, pharma, and others. If we can show you 100’s of potential sellers in your industry this gives you an indication of which companies are open to discuss a business sale. This also helps buyers to sharpen their acquisition criteria and really think through if an acquisition is the best alternative for their company as it is not an easy process. This should have a lot of value for an acquirer as the preparation of a business acquisition is very important. It is normally an expensive process and finding the right target is crucial!

Which activities have value for business buyers when considering an acquisition:

• Information about the process of a business acquisition?
• What is the value of a company? How do sellers value their company?
• Which is the ideal target for my company? List of possible sellers?
• Help in the negotiation of a good price and other acquisition condition
• Support in the due diligence process
• Help in drafting the legal contracts
• Summary of items where an M&A advisor adds value and conclusions

Information about the process of a business acquisition

I am not sure if most business buyers see a lot of value in getting a thorough understanding of the process of an acquisition. However, you must have it right! The business acquisition must be a success. If the acquisition is not a success everybody involved loses. An owner will receive a nice check (or bank transfer in practice) for the sale of the company and receives a further compensation if the company develops well (via the earn-out construction).

A buyer must think through the process, your objectives and understand the implications of your approach. Are you talking to only one seller? Have you screened this seller down to the last detail? Are you sure it is the right and best target for your company? Would it not be a plus to speak to multiple prospective sellers and see which one is most suitable?

What are the phases of the project where you should be careful? Which sellers will you approach, when and how is it best to do this? What are the key items you are looking for in a target? How are you sure you have found the best target? Is it smart to use an earn-out construction?

You can determine or answer all these questions yourself, but it might be wise to discuss these with an experienced M&A advisor.

What is the value of a company? How do sellers value their company?

In practice, we see most business sellers overvalue their own company. This is especially the case if they are being approached by a potential buyer. This applies even more for small size companies. The larger a company gets the easier it is to show comparable transactions. If companies are small (let’s say companies with a valuation <5 million euro) owners tend to overvalue their company. At the same time, the risks for a potential buyer get significantly larger.

I think there is much value here for an advisor that has practical experience with sellers and the way they value a company. If business sellers knew about the valuations that are sometimes being paid in practice, some would probably not even start the sales process. In the end, an advisor has a more objective view as to normal market valuations of companies.

Of course, it is possible that a buyer pays a small premium for a company that has a unique business position or access to new markets. However, paying a premium for the majority of companies is not required. We can use the standard multiples based on profit figures to determine the value of a company. If a seller wants a higher value, we help a buyer to pursue other options. This means comparing and finding other companies or just waiting 3 to 6 months and then speaking to the potential seller again.

How important is it for you to get a good practical idea about the valuation of a target company?

Which is the ideal target for my company? List of possible sellers?

This sellers list (often called a ‘long list’ and a ‘short list’) is important as it should contain the final acquisition target for your company. CFIE has lists of sellers in its various core industries as we have been in touch with 100’s of sellers over the last 15 years. For many of these sellers, we have written sell-side profiles.

Sometimes business buyers have a good idea of the most suitable seller for their company. However, there are often tens of possible sellers for a company that are not all known to an interested buyer. Industry specialists in a specific country might know a large number of possible sellers. Often, these advisors know the sellers much better than a potential buyer. Especially if this buyer is from abroad or from a different continent. Also, the advisors know thoroughly how a seller looks at your company and hence, how to get such a seller to the table to discuss a possible business acquisition. How valuable is it for you to know the potential acquisition targets for your company? Please give your opinion at the end of the article.

Help in the negotiation of a good price and other acquisition conditions

Is it useful for you as a buyer to have an advisor next to you? Is the experience of an advisor useful for you to help in reaching a lower acquisition price? It is important to see the value from the point of view of a prospective seller. Are you a good negotiator?

Are you familiar with M&A concepts like “cash and debt free”, “enterprise value” and what normal required working capital is from the point of view of a buyer? It is important to know the practical implications for your company and how much additional value (or loss of value) this can mean to you. Are you also able to negotiate additional conditions yourself? Please describe how much value you see in an advisor and what you expect from him or her in this regard.

Support in the due diligence process

What is the added value in the due diligence (DD) process? Can the DD be used by a buyer to delay the process or decrease the agreed valuation from the signed Letter of Intent (LOI)?

Do you see the value of an advisor in this part of the M&A process? If so, where do you think an advisor can add value in the DD process?

Help in drafting the legal contracts

As a business buyer, you will most often use a lawyer to help you during the SPA (Share Purchase Agreement) process. It is the normal business practice that a buyer drafts the SPA. The M&A advisor has been involved during the whole process and knows the crucial items that have been discussed. What is the advice and input of an M&A advisor worth in such a case?

Summary of circumstances where an M&A advisor adds value and conclusions

Here is a summary of some of the instances where an advisor can add value:

• You limit your options of possible sellers and the target seller might not be in line with your company strategy
• Finding various new potential acquisition targets is the specialty of an M&A advisor
• You lose time in case it doesn’t work out directly if you speak to just one seller. Or you risk paying a valuation that is too high
• Your negotiation power is weakened given you only have one alternative (compared to speaking to more prospective sellers)
• There might be many more and better-suited sellers out there of whom you are not awar
• The chances of success are lower and the price you pay might be higher
• Resources: the acquisition process takes a lot of additional time. You will most likely only use your key people. This might wear them out and the chances of your best people getting stressed are high
• Valuations: do you know the current market valuations? Put differently, are you sure you are not able to get a better deal with an equally qualified seller? Or pay a price that is too high?
• Time: if you have limited time you can be dragged into a drawn-out process needing to start over when time is not in your favor anymore
• If there is a cost motive, please also take the costs of your own time into account
• You might lose focus on your own company and its situation could deteriorate

Based on our practical experience, we know that organizing an acquisition yourself might work. Doing a successful business acquisition with the right target though is what matters. Finding the right seller is not easy at all. Using an advisor will give you the highest chance of a successful business acquisition.

What is your opinion on how buyers should approach a possible business acquisition and where specifically is the added value of an advisor? Please give your opinion here.

James Pugh | Saturday 24 October 2020 | website: https://capeq.co.uk/about-us
A really interesting article which as an advisor really resonates.

Would add that a good advisor ensures that the parties retain goodwill between them by dealing with any difficulties or problems without involving the principles. THis can be crucial for post completion integration to be succesful.

Most crucially an advisor adds momentum to transactions- loss of momentum kills far too often.