Last year Billy Fink, the fantastic editor of Axial's Forum, wrote an article that examined some of the benefits of hiring an M&A advisory firm to work for you in the eventual transition from your business. He went to the heart of the matter because one of the most important benefits of working with an M&A professional is simply this: The odds improve of you getting an optimal deal with a structure that suits your needs. You can read his entire article here: M&A Advisors Proven to Improve Valuations.
For those of you pressed for time, I will summarize some of the important ideas he shared. First, in terms of answering the age-old question of whether you need to hire an advisor and why, Mr. Fink wrote:
In an effort to definitively answer this question, several academics “analyzed a sample of 4,468 acquisitions of private sellers during the period of 1980 – 2012 to examine the decision and the consequences of hiring sell-side M&A advisors.”
The results bode well for intermediaries.
In the study, entitled Does Hiring M&A Advisors Matter for Private Sellers?, Agrawal et al. discovered that “private sellers receive significantly higher acquisition premiums when they retain M&A advisors.” Although “top-tier” intermediaries offered the highest acquisition premium, the benefit of the M&A advisor held true across all deal sizes.
OK, two key points can be gleaned from this paragraph and I have highlighted them: Sellers do conclusively receive more for their companies via the services of a qualified M&A firm AND this data applies to ALL deal sizes.
So the skeptics out there may be wondering, why? How can this be the case when I know exactly who my buyer will be? Well therein lies your answer: If you approach one buyer, the one you assume is your buyer (who usually is your closest competitor), you will not be creating a “limited auction” for your business, a vital step in getting an optimal deal. Again, this is how Mr. Fink describes this:
“Previous studies find that bargaining power is a significant determinant of the magnitude of private company valuations,” wrote the professors. “A key determinant of the seller’s bargaining power is the number of competing bids it receives.” Like supply and demand, “a seller has more negotiating leverage when a prospective buyer believes that it is competing with other bidders.” An M&A advisor helps drive acquisition premium by driving competition.
Best of all, the competition doesn’t even need to be real. According to Agrawal et al., the mere presence of an M&A advisor can induce a sense of competition.
Again, some critical points were made above. The most important is this: An M&A advisory firm, by its very definition, will force prospective buyers to consider that there will most likely be competitive bidders for your transaction, thus driving up its valuation. Could you create an actual limited auction on your own? Possibly, although unlikely, since you don’t have a database of thousands of buyers (like Generational Equity does, for example). Can you create the illusion of one? Unlikely, since most buyers will know you are only going to close one deal your entire life.
The fact that a professional M&A firm is a plus is really a given. The hurdle is convincing yourself to actually hire one. If you read Mr. Fink’s article to its terminus, the conclusion is pretty basic: To protect your single largest investment, hire an M&A firm.
Now it goes without saying that Generational Equity is an M&A advisor. What you may not know is that we recently closed our 500th transaction and have been ranked as the leading lower middle-market M&A firm for years.
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2021 Generational Equity, LLC. All Rights Reserved.
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
Dear Chris and Andre, I just wanted to say thanks for all your help. Even though this process was not an easy one, it was comforting to know that I had a capable team standing beside me. You made me feel like we were almost your only client or at least the most important one. Thanks again, and I will recommend your service in the future.Shenille Engelhart, Owner – CLS Technology
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
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