A few days ago, we referred briefly to a study published in 2016 that analyzed completed M&A transactions from 1993 through 2010 where the seller was a privately held company. The research, conducted by several professors, including Anup Agrawal, Tommy Cooper (University of Alabama), Qin Lian (Portland State University), and Qiming Wang (Willamette University), was comprehensive and detailed. Their conclusion was clear: Business owners that used professional M&A firms to represent them in the marketplace generated higher valuations for their companies than those that chose to find buyers without representation.
In fact, according to the authors, over half of the companies in their study did not use M&A advice:
A large proportion of private sellers do not hire M&A advisers despite having disadvantages in the M&A market relative to public sellers. In our sample of 3,281 acquisitions of private firms during 1993-2010, as many as 1,727 (or about 53%) private sellers did not use an M&A adviser. The decision by a large proportion of private sellers to not use advisers is interesting for several reasons:
I have taken the liberty of highlighting some of the key points above because based on our experience over the past several decades, we concur with these professors: Business owners that do not use professional guidance during an M&A event are at a serious disadvantage.
Since most entrepreneurs only sell one company in their lifetime, and the best way to learn about the intricacies of the process is via experience, they are at a severe disadvantage when dealing with professional buyers, many of whom complete several acquisitions annually. This means that most do not create a “limited auction” (as our deal makers specialize in) and, therefore, do not mandate top dollar when negotiating.
This is where M&A advisors “create significant value for their clients.” The reality is the Generational Group has a database of more than 34,000 buyers who update us regularly on what they are looking for in an acquisition target. Buyers are fully aware of their peers in our database and realize that they will most likely not be the only buyer bidding on a specific acquisition target. This creates additional demand for our clients, enabling us to obtain, more often than not, a premium value for their businesses.
The professors provide the following conclusion to their research:
We find that private sellers that hire advisers receive significantly higher acquisition premiums. Our estimates of the magnitude of this effect range from about 6% in matching models to about 25% in treatment effect or switching regressions. Among private sellers that hire advisers, we find that sellers that hire top-tier advisers receive higher acquisition premiums. Overall, our findings suggest that the hiring and reputation of M&A advisers improve the bargaining power and acquisition premiums of private sellers.
I have highlighted some of the more salient items. First, not only do entrepreneurs in general benefit from hiring M&A advisors, they greatly benefit from hiring a “top-tier” firm. Why? Because the bottom line of the study is quite simply this: Bargaining power, the ability to negotiate with buyers from a position of experience and the knowledge that the M&A firm has access to hundreds (or in our case, thousands) of buyers, balances out the power in the negotiations.
How does one measure “top-tier”? The best way to do that is to use a third party, like Thomson Reuters who tracks M&A transactions, and examine their annual rankings. If you do this, you will find that the Generational Group has been ranked No. 1 for deals closed up to $25 million for the past several years and rated in the top 10 for valuations up to $100 million during the same timeframe. You can see their 2015 data here: Thomson Reuters 2015 M&A League Tables.
You can find additional year rankings by following this link:
Our ability to close deals, and generate higher valuations is key to our success. Here is how a few of our clients describe our work:
To find out if our top-tier M&A advisory services are a good fit for you and your company, please contact us using the number and/or link below:
And special thanks to professors Agrawal, Cooper, Lian, and Wang for publishing this leading research on the impact of advice on M&A transactions. If you would like to read their entire study you can do so here: Does Hiring M&A Advisers Matter for Private Sellers?
By Carl Doerksen, Director of Corporate Development at Generational Equity.
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