the right advisor will help you achieve a premium-priced deal with minimal risk
to post-closing liabilities.
If you are considering selling your company,
your situation is analogous to a person facing major surgery. For that
individual, the most important decision is choosing the surgeon who performs
the operation. That decision will likely determine if and when the individual
returns to complete health. Your critical decision before proceeding with the
sale process is, “What investment banking/advisory firm (advisor) should I
retain to handle the transaction?”
The result of this decision will likely determine whether you achieve
a premium-priced deal with minimal risk to post-closing liabilities. If you are
the owner or chief executive officer of a middle-
market company (transaction price between $2 million and $250 million), the
importance of this selection is probably even greater, as many advisors serving
the middle market are less than adequate. The following advisor characteristics
should be taken into consideration when pursuing a premium-priced deal.
1. Your advisor should have an open and verifiable track record.
He/she should be willing to discuss any
non-proprietary information related to a prior deal, except for the specific
transaction price and deal terms. The advisor should provide you with a
thorough list of completed transactions, defining both sellers and buyers, and
this record should be made available for your unrestricted investigation. Talk
to the advisor’s former clients and substantiate the advisor’s claims relating
to prior transactions.
As a general rule, an advisory firm should consummate two deals per
professional person per year to be defined as “reasonably good.” An
“outstanding” firm should have a long-time record of consummating 3-4 deals per
person per year.
2. Your advisor should guide you from the beginning to the end of a transaction.
He must be able to help you plan and time the
sale. In addition, he must control all aspects of the deal. His job should not
end when a letter of intent (LOI) is executed. The advisor should be your lead
negotiator from the LOI until the execution of the definitive purchase
This level of involvement requires an advisor to possess highly
specialized knowledge in the area of reps, warranties and indemnifications.
These are critical issues, the financial consequences of which can potentially
be as financially significant as the purchase price.
terms that acquirers obtain in these areas are generally accepted by most legal
counsel as adequate. However, these normalized terms leave a seller in a
precarious post-closing situation that could cause them to potentially lose a significant
portion of the sale proceeds. Consequently, your advisor must have an intimate
familiarity with these issues and have the capability to control the deal
process from the LOI to the execution of the DPA. This will assure you the
maximum protection regarding reps, warranties and indemnifications.
3. Your advisor must be tough, aggressive and determined.
He must be able to convince a strong-willed,
sophisticated acquirer that things are going to be done in a way acceptable to
you. The advisor must understand the leverage points that will pressure an
acquirer to provide your desired price and deal terms.
It is often beneficial for middle-market sellers to retain a self-made man or
woman as an advisor. As an entrepreneur, he will better understand your makeup
and the things important to you. This should enable him to negotiate a deal
that will fully satisfy your needs. In addition, he should be more capable of
helping you deal with the myriad post-closing emotions that a seller often has
in the months following a deal’s completion.
4. Your advisor should take a business-oriented approach.
Most advisors believe the sale process is
only a financial exercise. Nothing could be further from the truth. Ask
yourself, “Do all publicly traded companies in a specific industry trade at the
same multiple of earnings?” Obviously, the answer is no. The reason is because
of the differences in the companies’ business foundations and what this portends
for future growth and/or threats to earnings.
The only way a seller’s business foundation can be evaluated and a
determination made about the company’s future growth opportunities and/or risks
is through an advisor’s thorough pre-sale investigation of the business’
foundation. This includes a detailed investigation of the capabilities of your
company’s operations and production, marketing, personnel, facilities,
purchasing and operational cost efficiencies, and demographic considerations
related to your industry.
By the time the process is concluded, the advisor must thoroughly understand
your business niche and how it correlates to future growth and profitability.
This will enable an accurate forecast of future profitability and earnings
before interest, taxes, depreciation and amortization (EBITDA).
Many advisors either do not possess the capabilities or are unwilling to spend
the time to perform this business investigation. Utilizing only a financially
oriented approach will likely have a serious negative impact on your
5. Your advisor should have a history of doing all-cash deals.
All-cash deals are conducive to minimizing
your post-closing exposure. Excepting certain highly unusual situations, there
is no good reason for a seller not to do an all-cash deal. Advisors that
recommend their clients accept other than all-cash deals are being overly
accommodative to an acquirer’s needs at the expense of their client.
6. Your advisor should clearly articulate his advice and ideas in a manner that provides strong guidance.
Advisors must have strength of will, a
breadth of knowledge of the acquisition process, and the ability to convey that
to a successful, independent entrepreneur in a way that makes the seller want
to follow his advice. Although the ceding of a minimal amount of control is
often difficult for a successful entrepreneur, it is necessary if the seller is
to maximize their transaction price.
Sellers should allow a qualified and proven advisor to guide and direct the
process, as the seller does not have the market expertise or experience to make
independent judgments on how to professionally handle the sale process.
Although the advisor should direct the process, the seller should always retain
the unqualified right to make all decisions regarding the acceptance or
rejection of specific deal pricing and terms. Only the seller should make those
Any seller that is foolhardy enough to want an advisor they can totally
control is making a critical mistake. They should realize that any advisor who
can be dominated by his client will also likely be dominated by the acquirer.
What the seller really needs is an advisor with a proven record of being able
to control large, sophisticated acquirers and obtain premium prices for their
7. If it is necessary to transact a premium-priced deal, your advisor must be patient.
You don’t want an advisor committed to a
quick sale, regardless of price, since the objective is to consummate a deal
only after a premium-price has been obtained. Until that price is realized, no
sale should occur. Although the normal time to close a deal is usually 6-12 months from
when an advisor starts evaluating the company, in unusual situations it might
take 2-5 years to consummate a premium-priced deal. In these cases (about 5-10%
of total deals), a much longer time is required if the seller’s legitimate
objectives are to be fully satisfied.
Discuss their overall record with a potential advisor. If they have not taken
an extremely long time to successfully complete a few sales, they are probably
more interested in “churning deals” than getting maximum value for their
8. If a company has multiple shareholders, who have significantly different financial and personal objectives and/or personal problems with each other, it becomes even more imperative to find a strong-willed advisor.
The advisor must have the expertise to
develop a solution to reasonably satisfy all shareholders, and the ability to
articulate why the compromises inherent in his solution will fairly benefit all
shareholders. This mandates not only a strong and forceful advisor, but also
one that has compassion and understanding. This will facilitate his
appreciation of the significance of the personal reasons, objectives and
conflicts that make certain divisive issues important to particular
shareholders. In this way, a compromise can be developed that will make all
shareholders agreeable to the solution.
A Successful Sale
There is no single approach to a sale that is
appropriate for all sellers. For an advisor to be consistently successful, he
must be creative. An advisor that takes the time to understand you, your
company and your needs will be able to determine your recipe for success. Your
advisor should be able to sustain the positions that will satisfy your personal
objectives and provide you with a premium-priced deal.
When you are selecting your advisor, you should not be looking for the
advisor with the most pleasing personality, nor should the length of time that
you have known him be a consideration. The most important
characteristics of an effective advisor are knowledge, experience, character,
integrity and toughness. Selling your company will probably be the largest
transaction in your life, and the right advisor should add at least 10-20% to
your transaction price.
For more information, contact George Spilka and Associates, Suite 301,
4284 Route 8, Allison Park, PA 15101; (412) 486-8189; fax (412) 486-3697;
e-mail firstname.lastname@example.org; or visit www.georgespilka.com.