This article is written as a companion piece to the article “Be Wary of the Guy Who Says He Wants to Buy Your Company (Part 1).” It is written for private company owners/shareholders of non-venture backed companies, and it’s best to read both parts, preferably in sequence. This section delves more deeply into the disadvantages of not using a professional M&A advisor when selling part or all of the company.
Disadvantages of Self-Representation
The reasons companies represent themselves when being acquired are
- to avoid paying fees to an investment bank, and/or
- they feel that they have the internal knowledge, staff and time to represent themselves, and/or
- they do not know the consequences of doing otherwise.
Very few mid-sized companies would have the resources to do this without putting themselves at a severe disadvantage, especially when facing an acquirer whose process knowledge is more sophisticated.
Not hiring a professional advisor to avoid a fee is a great way to lose a dollar by saving a nickel!
The point is best expressed by others who’ve sold companies using professional representation. A decade ago, The M&A Source professional association conducted a survey among business owners who had sold their company, using an intermediary.1 The result clearly reveals the tangible benefit of being professionally represented:
- 95.7% of sellers surveyed said the intermediary increased the offering price of their business by 10% or more
- 36% of sellers said it was increased by 10%
- 30% of sellers said it was increased by 20%
- 13% of sellers said it was increased by 30%
- 50% said that their stress was significantly lessened by using an intermediary to sell
- 90% said that the confidentiality of the transaction was better protected by the intermediary
It’s easy to infer from this data that the the gain achieved by utilizing the banker’s service is considerably greater than the fees paid. It should be intuitive; there’s a reason why few homeowners successfully sell their homes without agent representation, and the same principle applies.
Lack of Process and Context Knowledge – Few company owners have the experience or skills to handle transactions as complex as the acquisition of their company. Typically, owners/majority shareholders are consumed by running the business and are not involved in regular or frequent M&A transactions, hence unfamiliar with the important details that can mean a more or less successful outcome (such as valuation factors, negotiation processes, how and when to release what information, tax structures and consequences, earnout models, due diligence, etc.)
Managing a M&A process is complex, and demands knowledge of the M&A market and many disciplines, spanning industry transactions, economics, marketing, technological developments, finance, accounting, taxation and law.
Having a professional advisor on your side during an M&A transaction can result in a higher valuation, better terms, and less room for error.
Value Assessment, Enhancement and Positioning – Every company has elements of value and “warts.” A skilled intermediary knows how to truthfully play the strengths of the former, while managing the expectations and perceptions of the latter. Often, drivers of significant value are not readily apparent to owners. A skilled advisor will analyze the company to fully understand the value drivers and detractors.
Often, the advisor will recommend concurrent operational initiatives that will actually raise the company’s value, too.
Time and Distraction – The M&A process can take hundreds of hours from start to finish. No business owner who is running the business has such excess time. It is common for owners who take this process upon themselves to divert management focus on the business, which leads to declining sales, diminished attractiveness, a reduced offer price and likely, a terminated sale process.
I personally knew the owner of a mid-market company who was approached by a German company that wanted to acquire them. He did not yet know to contact a professional advisor, and managed the process himself, learning about it while doing it, and from the acquirer. The German company put a team of people inside his company to co-habitate for two months while going through the financials and a due diligence process. Meanwhile, the business owner was completely distracted from running the company, and business suffered. He tragically incurred a personal injury, and the sale process was terminated. Meanwhile, when I met him a year later, the company had lost significant value.
This story is not unusual.
Negotiation Training and Detachment – While business owners are sometimes formally trained in negotiation, even an otherwise qualified CEO lacks the emotional detachment that a third party brings. The intermediary serves an essential role as a “buffer” between the two parties to the transaction, which is particularly important if the process becomes adversarial. In fact, negotiations often occur without the company management present, because owners’ emotions can make them vulnerable in the negotiation and potentially terminate it.
A skilled negotiator can shift the process between competitive and collaborative negotiation and employ strategies and tactics as warranted, to reach a deal that derives the greatest value for the client, while satisfying the needs of all parties so that a deal can be completed.
Confidentiality Protection – It is crucial to get a valid confidentiality agreement executed that prevents the other party from using the information in any way other than to decide whether to pursue the transaction. It must guard against solicitation of employees, vendors or customers, and/or using the information to competitive advantage in any way. It needs to be a properly written, legal agreement.
Sellers who represent themselves in the discussion often neglect this mechanism or take short cuts that leave them vulnerable.
Even when a professional advisor is engaged, when confidentiality is broken, it typically occurs from within the client company – outside the advisor’s control. Without a professional advisor, it’s even far more likely to occur.
The consequences of a breach can be devastating. Employees may become fearful and leave. Competitors will quickly play the knowledge to their advantage and solicit your customers. Suppliers may reevaluate long standing terms and agreements.
Fiduciary Responsibility to Shareholders – This issue is much less likely to arise in the case of a private company than a public one, but all company corporate officers owe a duty to other shareholders to place the company’s interests ahead of their own. In the absence of professional advisors, disgruntled shareholders may litigate for fraud or negligence, claiming that officers shirked fiduciary responsibility by not utilizing outside counsel to strive for a better deal (or at least get a Fairness Opinion stating that the single party negotiated sale was fair to shareholders).
Footnote 1. Results of a survey conducted by Smith Bucklin and Associates, commissioned by the M&A Source; from presentation “What Do Buyers & Sellers Think About Using a M&A Source Intermediary,” 2006
Disclaimer: This article provides general information, and is not intended to constitute, and should not be construed as, legal, tax, accounting or business advice, nor does it constitute an offer to sell or to purchase securities. Rather, it is summary compilation of timely issues confronting your industry and as such does not purport to be a full recitation of the matters presented. Prior to acting upon any information set forth in this article or related to this article, you should consult independent counsel and/or more detail contained in the Source Information. The article reflects the opinion of the writer, and does not necessarily reflect the opinions of Mid-Market Securities, LLC, or its affiliates. IRS Circular 230 Disclosure: In order to comply with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax discussion contained in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.