How to Choose an M&A Advisor

The day has come when your entrepreneurial spirit has paid off. The business that you’ve built from the ground up is getting the right kind of attention–and a big private equity firm or large corporation is knocking on your door.

They’re eager to acquire your company. It’s a moment that is both exhilarating and terrifying.

This could be the most important transaction you will face in business. The stakes are high. You might get a generous offer upfront, but it’s likely not enough. 

The real question is–how do you navigate your next steps to secure a great outcome for the years of hard work?

Mergers and acquisitions (M&A) are complex. It’s best to find an advisor that you can trust to help you navigate the process. It’s like hiring a realtor to sell a home or a financial advisor to plan for retirement–the right help makes a big difference in the outcome.

Let’s take a closer look at what you can expect from an M&A advisor and how to choose the right fit for your needs.

Working with the right advisor is critical to your M&A success

Mergers and acquisitions–while common, are not in the realm of expertise for the typical entrepreneur or executive. Buying or selling a business is a complex process with many moving parts that require varying degrees of specialized knowledge and a lot of experience.

Even in the finance industry, M&A is a highly specialized area. For example, Goldman Sachs–one of the largest investment banking firms, employs more than 40k finance professionals. However, less than 10% of those employees specialize in investment banking and even fewer in M&A.

Even within the realm of M&A specializations, knowledge and expertise is varied. Every deal is unique, and nearly every aspect of the deal is negotiable between the parties involved. The value of a business is subjective–based on factors like:

• Market Strength and Positioning
• Financial Performance
• Strategic Drivers
• Trends and Projections
• Growth Prospects
• Stability and Consistency
• Past Valuations 
• Proprietary Intellectual Property and Technology
• Industry
• Geographic Positioning
• Business, Legal, or Financial Risk

When it comes down to it–how much your company is worth is an opinion. A knowledgeable M&A advisor can help draw out the right information during negotiations to add value for the other party, supporting an offer that is more likely to favor your interests.

In plain language–this means more money for sellers or more bargaining power and better terms for buyers.

After you have invested 5, 10, or 20+ years of blood, sweat, and tears into growing your business, the final culmination of your success is packaged up in this business deal. A trusted M&A advisor can help you navigate the process of selling your business with confidence.

What to look for when selecting an M&A advisory firm

With everything that is riding on your M&A deal, choosing the right advisory firm is key to a successful outcome. You want more than someone who knows the legalese of M&A contracts; you want someone who knows business. You want someone who has experience and the scope to support all your needs.

When selecting a good M&A advisory firm consider the following factors:

• Extensive M&A Experience
• Team Composition
• Scope of Support
• Firm Structure
• Fee Model

Extensive M&A experience

First and foremost–look for an advisor that has a significant breadth of experience in mergers and acquisitions. No two deals are ever alike. When it’s your turn to sit at the table, you need an advisory team that has been through the process many times before.

At a minimum, the team structure should provide a lead advisor with extensive M&A experience and support from a junior team. You need someone who has ducked and weaved their way through multiple M&As with fluidity and success. There will be unexpected challenges, so you need someone who has the experience and foresight to see where the road leads and guide you in making the right decisions as you go.

A few probing questions to learn more about the experience of the senior advisor include:

• How would you handle the loss of a large customer during the transition? 
• What diligence should you conduct when rolling over equity?
• How do you negotiate net working capital targets and debt-like items?
• How do you structure earn-outs?

Team composition

Experience comes in many forms. While it’s imperative that you choose an advisory team with strong leadership, it’s also important to consider what knowledge the team has as a whole. Even the most experienced advisors need support with specialized expertise–that’s where the junior team composition comes in.

Mergers and acquisitions are lengthy and tedious. A deal can take six months or more, requiring detailed intensive due diligence to carefully review financials, projections, risks, operating plans, and much more. 

During that time, the senior advisor is committed to more than one project. It’s the junior team that does the legwork and rounds out the core competencies of the senior advisor to provide knowledge and experience across the entire process.

But how much experience is enough?

Ideally, you should be looking at a team with at least five years of M&A experience offering a mix of buy-side M&A experience such as private equity and corporate development.

Scope of support

Just like no two deals are the same, neither are advisory teams. The services offered can vary from one team to another, as well as the depth of experience. Identifying the level of support that you need is key for framing your expectations and ultimately making the right decision.

Some firms specialize in frameworks. They provide templates and instructions, but leave the detailed work like collecting information and pulling analytics to you. Other full-service firms conduct research and participate in negotiations on your behalf.

A full-service firm might:

• Conduct a Quality of Earnings Analysis
• Assess KPI Trends 
• Create Financial Forecasts
• Actively Negotiate Terms

Keep in mind that a business must continue to perform well during the lengthy M&A process, or the buyers might get cold feet. A full-service firm can take care of the detailed prep work while you continue to focus on managing your business.

When choosing the right team, you should ask questions about their scope of support (what they offer) and their capacity to take on your project (what they’re currently working on). 

Teams that have more than three deals concurrently risk being too diluted to give your deal the time and attention it needs.

Firm structure: partnership vs. independent contractors

In the financial world, there are two common ways that advisory teams are structured. The first is a partnership where the partners are equally invested and equally compensated based on the success of the firm. The second is an independent contractor model where they share resources, but each advisor is in it to win it for themselves.

Many investment banks are structured using the contractor model where managing directors “eat what they kill,” so to speak. This means that the managing partner will be highly motivated to see a successful outcome, but you may not see the same level of collaboration and support across the organization.

By contrast, highly successful firms like Goldman Sachs and McKinsey favor a partnership model that fosters collaboration and shared successes. In most cases, the partnership model yields the most comprehensive support. So, if you are choosing an advisor for the strengths their organization offers, you want to ensure that everyone is on your team and equally motivated to see your success–not just the senior partner who is pitching you.

Fee model: success-based fee structure vs. hourly rates

How you pay for advisory services can also vary based on the fee structure of the firm that is hired. There are two primary fee models. The first is a success-based fee, where you pay a percentage based on the final deal. The second is an hourly rate structure where you pay for the time that the firm spends on your deal, regardless of the outcome.

The question is–which one is better?

You might think that success-based fees are good because a favorable deal means a generous fee. But often, that’s not what actually happens. 

Best-selling author and University of Chicago Economics Professor Steven Levitt has talked about the downsides to success-based fees in real estate in his book, Freakonomics. The long and short of his research shows that realtors spend far less time selling client homes compared to their own homes because the success-based fee model incentivizes a quick closing, not necessarily a higher price.

Another pitfall with success-based fees is clauses like ‘tail period’ commitments which may entitle the firm to a payout even if the deal goes in another direction. Committing to these arrangements can limit your options and may end up costing you much more than a firm with a different fee structure.

By comparison, the hourly rate is straightforward. You are billed for the amount of time that the firm works on your deal. If you have a well-performing business with a clear conviction to sell an hourly fee structure can cost much less while driving better results.

What is not as important as you might think:

As you begin to look for an advisor, you’ll find that many incumbent investment banks emphasize their industry experience and familiarity with buyers as key selling points. While it sounds pretty, industry-specific experience isn’t as important as you might think in M&As. 

Top firms like Morgan Stanley and JP Morgan operate with industry-agnostic teams that are dedicated to M&A execution. That’s right–they intentionally do not cater to industry expertise because it really doesn’t matter. 

If anything, the diverse exposure across a variety of industries makes teams more adaptable and versatile. Successful investment bankers can easily move around to different teams based on priorities and strategies rather than operating within industry-specific designations. 

Similarly, the value of “buyer contacts” has been diluted by easy access to information. Anyone with access to the right databases can easily collect the information that they need to find the right buyers and network through the steps of a successful M&A transaction.

Questions to ask before hiring an M&A advisor

Collecting the right information is the first step in finding a great M&A advisor. Here are a few questions that you should be asking as you begin to consider your options.

How long have you been doing mergers and acquisitions?

Learning about the length and breadth of service that an advisor can offer will help you quickly determine whether or not they are equipped to handle your deal. Remember, experience takes many forms, but ideally, they will be able to provide multiple first-hand examples of success in M&As.

Who will be on the team that executes the deal?

Having the support of a team with varied expertise is important. Don’t be shy about asking to meet everyone before making a commitment. And absolutely ask questions probing their specific areas of expertise, making sure that the value that the team brings to the table aligns with your needs.

What will the division of work look like?

Here, you want to know how much time you will need to commit to working with the firm. Some teams handle everything, only reaching out to you when they need to discuss key decisions. Other firms might leave you to do the heavy work, taking your focus away from running your business.

How is your firm structured?

With this question, you want to better understand how information and resources are shared across the organization. If the managing partner is an independent contractor, there is some risk that you may not have full, unbridled access to all areas of expertise under the firm’s umbrella. You may want to ask additional probing questions regarding how collaborative teams are and how special requests for expert review might be handled.

What is your fee model and key terms?

Of course, you want to understand what you are paying for–and how much the service is going to cost. But be careful; this is a question that sometimes lacks transparency. An hourly rate structure is relatively straightforward. You can ask for their rates and an estimate of typical time commitments. However, if a firm doesn’t offer information on tail periods or exclusivity clauses–make sure that you ask.

Embarc Advisors can provide you with the expertise to move forward with ease

At Embarc Advisors, we’ve taken a different approach to M&A advisory. We’re delivering Fortune 500-level services to businesses that operate on a smaller scale, like entrepreneurs, SMB founders, and startups. 

We have curated a highly differentiated team with extensive buy-side experience to understand what buyers are looking for and how they act so that we can help you anticipate their motivators and next steps.

At Embarc, we’re driven by focused, detailed action that nets big results. We charge an hourly fee instead of a success-based fee so that we are always committed to seeing our current deals through successfully and not on closing more deals quickly. 

If you’re ready to explore your next steps, book a consultation with Embarc Advisors today.

To learn more about the M&A process, read our post on Understanding Term Sheet Negotiation. In this post; we provide an in-depth look at what this process looks like and what goes on the final term sheet.