Classic Mistakes in Exit Strategy vol. 2: Bringing in an M&A Advisor at the 11th Hour
By Eric Michaels, Senior Analyst, MergerTech Advisors
Every day we are flooded with commercials from financial advisors telling us to do the same thing: plan ahead for your future, roadmap your retirement, start saving early, etc.
Why should financial advisory only apply to insurance and stocks? Making decisions that maximize the value of your business is no different from planning for your future. The job of a good M&A advisor/investment banker is to guide business owners into making decisions that will maximize value and ultimately help them cash out their substantial business equity.
Typically, business owners decide to bring in an M&A advisor when they believe “the time is right.” To put it simply, the time is right when you are no longer running a start-up. In today’s market, you need to be planning on growing through acquisition or selling your business (especially in the technology sector). Every company will hit speed bumps. Crossing them without slowing down your growth can be accomplished in one of three ways: get more funding, make a strategic acquisition, or become an acquisition for a larger business. M&A advisors help identify those speed bumps early and guide business owners through them.
M&A advisors constantly see what qualities of a business are attractive to buyers on a day to day basis. While anyone can see what is happening in the public markets by checking stock tickers and reading the news, companies that are not listed on an exchange rarely give out such sensitive information. Since M&A advisors work as intermediaries between buyers and sellers, they become privy to invaluable information that business owners need in order to maximize the value of their business.
Think of your business as an investment. Considering that you have likely invested a sizeable amount of personal wealth into it, this should be easy. As an investment, you want to see its value appreciate. Your business can do this by either growing its bottom line or by getting into areas that are more attractive. For example, a business that has recurring revenue from clients will be worth more than a company that generates many one time sales. This is because it requires more effort to make new sales than to maintain clients on monthly, or even annual, contracts.
Unlike investments traded on public exchanges, private companies are highly illiquid and cannot be sold quickly. A traditional M&A process could take 6 to 9 months to reach an agreement with up to an additional 3 months of due diligence before officially sealing the deal. Generally, an investment banking team will devote substantial time and resources in the initial months to understanding the basics of your business. Many traditional investment bankers have a significant amount of deal experience, but lack the operational experience needed to accelerate the learning process. Developing a relationship earlier with an industry-focused M&A advisor who understands your business can eliminate such delays, giving you a faster process with greater certainty to closing a deal (this may be a good opportunity to point out that the M&A advisory team at MergerTech falls into the industry-focused category).
Starting a conversation with an M&A advisor will give you the opportunity to gain insight into what is driving business value today. It will also accelerate your M&A process as the need for initial research and other preparations will not exist. As you and your banker build a relationship, the advisor will gain a deep understanding of how your business operates and where it fits in your industry. By the time you decide to run an M&A process, your advisor will be ready to represent you and have enough knowledge about your business to maximize the value of your transaction.