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Hiring an Investment Bank That Specializes in M&A Improves Seller Outcomes, Here’s Why

by | September 26, 2019 | M&A Education & Market, Exit Planning, Education, M&A, Sell-side, Owner Considerations

Reading Time: 7 minutes

Selling your company is a major life decision. Not only do you want to get the highest return possible, you want to ensure that the legacy you’ve built lives on after you sell.

But many CEOs choose to navigate the sales process themselves rather than choosing help from an M&A advisor. Recent studies show that these business owners are losing money by taking this risk and not choosing an investment bank to partner with them through the process.

But it is not only money they are leaving on the table. They also see a notable drop in the way they feel about the outcome.

Researchers from the University of Alabama and Louisiana Tech University parsed data on more than 4,500 privately held middle market businesses that were sold over the course of the last 30 years. The conclusion was clear. Private sellers who retain the services of an investment banker receive higher acquisition premiums than those who went it alone. Depending on the specific industry, the assistance of an investment banker in facilitating the sale leads to a 5 to 20% increase in sale price on average.

“(Our study) provides empirical evidence that financial advisers improve M&A outcomes for private sellers, (who) are more likely to lack deal-making experience and negotiating skills, and hence benefit more from M&A adviser expertise,” the study’s authors concluded.

Other research by Fairfield University professor Michael McDonald indicated that 84% percent of business owners felt confident that their decision to hire an investment banker helped add value to the entire sales transaction. McDonald surveyed 85 individuals who sold their middle-market company (defined as having a value between $10 and $250 million).

“The survey results suggest that managing the sale process is the most valuable service provided by investment bankers,” wrote McDonald. “The majority of business owners felt that investment bankers added value in the sale transaction, and that the business owners were pleased with their decision to hire the investment bankers.”

Yet another study, from the International Business Broker’s Association shows that “90% of business sellers using an intermediary felt that the representative’s involvement resulted in a more confidential sales process and significantly reduced stress.”

The conclusion from these studies is clear. Investment bankers can help tip the scale of power back to the seller’s side of the table, giving them more choices and more control over how, when and to whom they sell their company.

The Process Perfected: Merit Investment Bank & Company’s M&A 2.0

Merit Investment Bank & Company has perfected the process of helping middle-market business owners feel confident in the outcome of their sale. Here are 10 reasons why the Merit Investment Bank & Company’s M&A 2.0 process has proven to be particularly successful.

There are no shortcuts in our M&A sales process.

The process of selling a company is complex and not to be taken lightly by either the buyer or seller, from pre-sale preparation to shepherding the process through close. However, the rewards can be great for both sides if done correctly. Running the full process is the only way to increase the odds of a successful outcome. 

The Stakes Are Too High To NOT Have an Investment Banker on Your Side

Unless you have sold dozens of businesses, chances are this is a once in a lifetime event as well as your largest business transaction. It can be a “legacy maker” or a “legacy breaker.” You may be financially comfortable and see having a couple of suitors as a logical end to the process of building your company’s value, however, this is just the beginning of the most important parts of your business journey – capturing that value. Do not leave it to chance. Having a professional licensed investment banker in the process statistically yields better results (in excess of fees) and guards you against the dreaded failed deal or getting a poor deal.

A Skilled M&A Advisor Can Harness the Power of Positive Alternatives

At Merit Investment Bank we like to provide owners options, choice and control as much as we can in the process. One of the most effective ways to achieve this is through uncovering positive alternatives. Our goal is to provide you with lots of suitors to choose from, not only from a price standpoint but from a terms and alignment standpoint. It is not always the highest price that is the best overall deal; there are other terms that may win the day. Positive alternatives allow you choice and a better overall outcome. 

Ramping up the Competition Really Works in M&A Transactions

The industry realizes that valuable companies command premiums. Companies, whether strategic or private equity, know that in order to be the “winning bidder” they will have to check many of the seller’s boxes and meet many expectations – not just price. How will they treat your people, your key managers or remaining family in the business? How will they treat your customers? A competitive process ferrets out how your new acquirer will behave under pressure, and will give you some insight into their future plans for the company and your legacy.

Investment Bankers Connect You to Broad Strategic Auctions

In concert with the above point (competition works!), we believe running a broad or strategic auction is the best way to keep buyers not only competitive but honest. You are the bride: they must court you and remain incentivized to do so in a managed auction-like process where one winner will be crowned. The acquirer will want to dive very deeply into your company during due diligence. Before letting the fox in the hen house so to speak, it is wise to remove as many of his claws and teeth as we can. An auction process keeps us in the bride status much longer and keeps the power where it belongs: on your side of the table.

M&A Investment Bankers Will Create a Wider Universe of Buyers

Most sellers can imagine companies they know that might want to purchase them. We call these the “known” or “logical” buyers. However, we find on average 50% of broad auctions result in selling the company to an acquirer the buyer did not know. In other words, an “illogical” buyer paid the most for the company or provided the best terms. With global buyers and amazing data resources, we are able to deliver diverse potential buyers by running a full process. Trust the process, let the market work and your choices will widen – ultimately yielding a better result.

Investment Bankers Protect You from Post-LOI Discounts

Preparing the company as well as preparing to highlight the opportunity to a wide universe of buyers is Step One to ensuring we capture the value of your life’s work. Being prepared to go to market as well as being prepared to go through the due diligence process is the best insurance against in-deal discounts often “uncovered” by buyers in the due diligence process. Expressed differently, buyers look to apply discounts to purchase price after they have given you “a number” in the LOI. Naïve sellers often mentally cash the check at LOI and then proceed to get whittled down in due diligence. Preparation is key, and a full process allows our investment banking team along with your attorney and CPA to minimize any post LOI discounts.

Investment Bankers Can Help You Retain Control and Shares

For those asked to participate in an earn-out, we can often mitigate that risk by converting that into a stake remaining in the company. That “second bite of the apple,” or keeping some shares as an investment in the firm going forward, provides options, choice and control exercised on your behalf vs. accepting the last offer standing. By keeping competition alive and using a time-limited process, we are able to drive values and keep everyone’s interests aligned as closely as possible, often enabling you to get more overall for the transaction than if you sold 100% of the firm.

Investment Bankers Know That Buyers Sometimes Change Their Minds

Often times, for no reason we can fathom, corporate or strategic buyers change their minds mid-deal. Markets change, CEOs change, stock prices change, interest rates change, strategy changes and sometimes it is just not the right fit. Many a baffled owner has asked “why” and sometimes the answer does not feel complete. We strive to protect you by guarding against “opportunistic buyers” looking for bargains, as well as against strategic buyers dropping out. We do so by having other suitors in the queue to bring value and compete for your company. Being left at the altar is painful; we want to make sure the right deal goes through.

M&A Investment Bankers Keep the Odds in Your Favor

Most deals have some form of earn-out to bridge the gap between what sellers would like to sell for and what buyers want to pay. Providing multiple offers in an auction-type process can ensure you receive better terms and a fairer price. Sometimes the lower all-cash deal is better than the highest number with all sorts of strings attached that affect the likelihood of you ever seeing your earn out. Options help keep the odds in your favor.

Okay, I’m Convinced, What Are My Next Steps?

If you are feeling overwhelmed by this list, there is good news. We will do a good majority of the preparation for going to market, negotiating various deal points at the various stages of a deal in this process and will advise on the best terms and structure, leaving you to consider the best choices, cultural fit and alignment potential.

We will leave you more time to run the business or contemplate outcomes which honor your legacy and reward you for your life’s work.

And after suitors realize you have hired professional representation (and they cannot opportunistically purchase you), they embrace the fact that a licensed investment banker is representing you. They realize that representation increases the likelihood of a fair deal being struck and coming to fruition (just as acquirers change their mind, so too do sellers). Preparing and running a full process improves the likelihood of a positive outcome for all sides.

We understand this can be stressful, especially if you have not done many divestitures or acquisitions along the way. Just as you trust a licensed attorney to represent your legal dealings, a licensed CPA to handle and advise you on your audit and taxes, and a licensed financial planner or wealth manager to manage your money, we urge you to trust in the experience and expertise of the licensed investment banking team at JD Merit to deliver hard-fought results and help you sell your company.

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