Happauge Industrial Association Long Island

Why Use an M&A Advisor in a Seller's Market?

By Gregg Schor, CEO, Protegrity Advisors

For middle market companies with net profits (more accurately, EBITDA) of at least $1M, it is indeed a "seller's market."

One of the driving forces behind this frenzy is the plethora of entities hunting for revenue, profits, products, services, customers, and talent to acquire. Whereas in the past, the majority of transactions involved strategic buyers seeking cross-selling opportunities or private equity firms also being active at the high end of the market, today's M&A landscape is vastly different.

There are many reasons for the change. In recent years there has been a proliferation of private equity firms whose investment criteria falls squarely within the lower middle market revenue ranges of $5M to $100M. Family offices, previously investing their money into private equity funds, have become increasingly active in buying companies directly in an effort to generate greater returns and to have more visibility into and control over their investments. Search funds, which are typically two or three executives with advanced degrees and a track record sufficient to attract their own investor group (which can range from institutional to high net worth individuals), can be thought of as a built-for-purpose fund whose objective is to acquire, run, and grow a company for a future exit. In addition, serial entrepreneurs who can write their own check remain on the lookout for their next challenge and growth opportunity.

In a climate so favorable to sellers, business owners who receive unsolicited inquiries from one or more of these categories of buyers may ask themselves whether they need an M&A advisor. The answer is unequivocally YES. Here, some of the most critical reasons:

  1. Qualifying Potential Buyers. As a result of the competition between prospective buyers for a limited number of companies which are privately held (and with therefore little public information available), buyers have become more aggressive about contacting business owners and making initial inquiries to trawl for information to determine if they are a potential target. While they are not purposely misleading the business owners, these buyers have very specific deal criteria and cast a wide web in order to catch very few select fish. Consequently, business owners excited that a private equity firm contacted them and wants to know more leads to wasting precious time and disclosing information prematurely or in a manner that is counterproductive to the business owner's interests.

    Not only will an experienced M&A advisor be able to filter and deflect inquiries which will be dead ends, but he or she will also already have a network of potential buyers and the ability to research and identify other qualified buyers.

  2. Understanding the Pros and Cons of the Buyer Categories. Do you want to sell 100% of your business or retain some equity? Do you want to continue working for a brief transition period, or stay on indefinitely to help the company get to the next level? Are you willing to leave some cash on the table with the objective of having a second payout in five years which could be larger than the current transaction? Do you have key employees or family members who you want to make sure remain employed by the new owner? Are there concerns about the buyer being a potential competitor if a deal does not happen? Which category of buyer typically gives higher valuations? Is revenue or EBITDA more important?

    While obviously sale price is a critical component of any sale, there are many complex and interrelated issues that need to be thoroughly examined as part of the process with a trusted advisor who understands the objectives and characteristics of each type of buyer.

  3. Maintaining Focus and Confidentiality. As any successful business owner knows, running a business is more than a full-time job already. Taking on the additional responsibilities involved in selling a business—such as identifying and qualifying buyers, reviewing and making adjustments to financial statements for valuation purposes (and knowing what adjustments to make), preparing marketing materials, preparing for due diligence requests and controlling exchanges of information, securing and negotiating letters of intent with multiple bidders, coordinating among all the relevant service providers (including lawyers, accountants, and wealth management professionals), AND keeping the possibility of a sale confidential from employees, customers, suppliers, and competitors—carries unwarranted risk. The fact is, it is not possible for a business owner to do everything effectively.

    Allowing an M&A advisor to do his or her job, which enables the business owner to keep running the business with as little distraction as possible, is critical to the continued profitability and viability of the business, regardless of whether the business owner ultimately decides to sell.

  4. Value Proposition. A professionally managed sales process by an experienced M&A advisor should result in a purchase price significantly higher than the business owner would have been able to achieve on his or her own, typically offsetting the fees paid to the M&A advisor by a healthy multiple. Moreover, the process is conducted in a way that substantially mitigates the risks associated with such an endeavor.

  5. Experience with the M&A Process. There is no substitute for proper advance preparation, honest and objective assessments, knowing the potential pitfalls at every stage, anticipating buyer objections and being armed to counter them, understanding what factors positively and negatively impact valuations, and having the astuteness to know when to negotiate and when to stand firm. Business owners who do not have this experience and do not engage an M&A advisor will be doing themselves a tremendous disservice.

Today's "seller's market" does not mean that buyers will pay irrational multiples for middle market companies. However, it does mean that the number and types of potential buyers have increased, which in many ways makes it more important than ever for business owners to have the right M&A advisor at their side to guide them through what in all likelihood will be the most important transaction of their–and their families'–lives.

Gregg Schor is the CEO of Protegrity Advisors, a leading regional M&A advisory firm serving businesses with revenue from $5 million to $100 million across a wide range of industries including retail, technology, healthcare, and construction. Headquartered in Ronkonkoma, Protegrity Advisors has relationships with private equity, strategic and other types of buyers and sellers across the United States and internationally. If you are thinking of selling your business, call Protegrity Advisors at (631) 285-3172 or email Gregg at gschor@protegrityadvisors.com.

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