George Spilka & Associates

If you are considering selling your company, your situation is analogous to a person facing major surgery. For that individual, the most important decision will be the surgeon to perform the operation. That decision will likely determine if and how quickly, the individual returns to complete health. Your critical decision before proceeding with the sale process is, “What investment banking/advisory firm (advisor) should I retain to handle the transaction?”. This decision will likely determine whether you achieve a premium-priced deal with minimal risk to post-closing liabilities. If you are the owner or CEO of a middle market company, defined as companies with a transaction price between $2-$250 million, the importance of this selection is probably even greater, as many advisors serving the middle market are less than adequate.

What are the characteristics of an advisor that will produce a premium-priced deal? This article defines the key factors to investigate, if you are to find the right advisor for you.

1. Your advisor should have an open and verifiable “track record”. He/she should be willing to discuss any non-proprietary information related to a prior deal except for the transaction price and deal terms. The advisor should provide you a thorough list of completed transactions, which defines both sellers and buyers. This record should be made available for your unrestricted investigation. These deals should be supported by references that you can directly contact to substantiate the advisor’s claims relating to prior transactions. Talk to the advisor’s former clients and decide if their record warrants hiring them to handle the largest transaction of your career.
As a general rule, an advisor should consummate two deals per professional person per year to be defined as “reasonably good”. An “outstanding” firm should have a long-time record of consummating 3-4 deals per person per year.

2. You want an advisor that guides you from the beginning to the end of a transaction. He must be able to help you plan and time the sale. In addition, he must control all aspects of the deal. His job should not end when a Letter of Intent (LOI) is executed. The advisor should be your lead negotiator from the LOI until the execution of the Definitive Purchase Agreement (DPA). This requires they possess highly specialized knowledge in the area of reps, warranties and indemnifications. These are critical issues, whose financial consequences can potentially be as financially significant as the purchase price. The normal terms that acquirers usually obtain in these areas are generally accepted by most legal counsel as adequate. However I believe these normalized terms leave a seller in a precarious post-closing situation, which could cause them to potentially lose a significant portion of the sale proceeds. Consequently, your advisor must have an intimate familiarity with these issues and have the capability to control the deal process from the LOI to the execution of the DPA. This will assure you the maximum protection in the reps, warranties and indemnifications.

3. For you to obtain a premium price, your advisor must be tough, aggressive and determined. This is necessary to convince a strong-willed, sophisticated acquirer that things are going to be done in a way acceptable to you. The advisor must understand the leverage points that will pressure an acquirer to provide your desired price and deal terms.
It is often beneficial for middle market sellers to retain an advisor that is a self-made man or woman. This type of advisor will probably be an entrepreneur just like yourself. Correspondingly, he will better understand your make-up and the things important to you. This should enable him to negotiate a deal that will fully satisfy your needs. In addition, he should be more capable of helping you deal with the myriad of post-closing emotions that a seller often has in the months following a deal’s completion.

4. You want an advisor that takes a business-oriented as opposed to a financially-oriented approach to the valuation and sale of your company. Most advisors believe the sale process is only a financial exercise. Nothing could be further from the truth. Ask yourself the question, “Do all publicly-traded companies in a specific industry trade at the same multiple of earnings?”. Obviously, the answer is no. The reason is because of the differences in the companies’ business foundation and what this portends for future growth and/or threats to earnings. The only way a seller’s business foundation can be evaluated and a determination made about the company’s future growth opportunities and/or risks is by your advisor’s thorough pre-sale investigation of your business foundation. This includes a detailed investigation of the capabilities of your company’s operations and production, marketing, personnel, facilities, purchasing and operational cost efficiencies, and demographic considerations related to your industry. By the time the process is concluded, the advisor must thoroughly understand your business niche, and how it correlates to future growth and profitability. This will enable an accurate forecast of future profitability and EBITDA.
Many advisors either do not possess the capabilities or are unwilling to spend the time to perform this business investigation. Utilizing only a financially-oriented approach will likely have a serious negative impact on your transaction price.

5. Your advisor should have a history of doing all-cash deals. This type of deal is conducive to minimizing your post-closing exposure. Excepting certain highly unusual situations, there is no good reason for a seller not to do an all-cash deal. Advisors that recommend their clients accept other than all-cash deals are being overly accommodative to an acquirer’s needs at the expense of their client.

6. You need an advisor that clearly articulates his advice and ideas in a manner that provides strong guidance to a client. The advisor must have the strength of will, the breadth of knowledge of the acquisition process, and the ability to convey that to a successful, independent entrepreneur in a way conducive to make the seller want to follow his advice. Although the ceding of a minimal amount of control is often difficult for a successful entrepreneur, it is necessary if the seller is to maximize their transaction price. They should allow a qualified and proven advisor to guide and direct the process as the seller does not have the market expertise or experience to make independent judgments on how to professionally handle the sale process. Although the advisor should direct the process, the seller should always retain the unqualified right to make all decisions regarding the acceptance or rejection of specific deal pricing and terms. Only the seller should make those decisions.

Any seller that is foolhardy enough to want an advisor they can totally control is making a critical mistake. They should realize that any advisor who can be dominated by his client will also be likely dominated by the acquirer. What the seller really needs is the rare advisor with the proven record of being able to control large, sophisticated acquirers and obtain premium prices for their clients.

7. If it is necessary to transact a premium-priced deal, your advisor must be patient. You don’t want an advisor committed to a quick sale, regardless of price, as the objective is to consummate a deal only after a premium-price has been obtained. Until that is realized, no sale should occur.

Although the normal time to transact a deal is usually 6-12 months from when an advisor starts evaluating the company, in unusual situations it might take 2-5 years to consummate a premium-priced deal. In these cases, probably about 5-10% of total deals, a much longer time is required if the seller’s legitimate objectives are to be fully satisfied. Discuss their overall record with a potential advisor. If they have not taken an extremely long time to successfully complete a few sales, it probably is indicative they are more interested in “churning deals” at less than a premium price than in getting maximum value for their clients.

8. If a company has multiple shareholders, who have significantly different financial and personal objectives and/or personal problems with each other, it becomes even more imperative to find a strong-willed advisor. The advisor must have the expertise to develop a solution to reasonably satisfy all shareholders, and the ability to articulate why the compromises inherent in his solution will fairly benefit all shareholders. This mandates not only a strong and forceful advisor, but also one that has compassion and understanding. This will facilitate his appreciation of the significance of the personal reasons, objectives and conflicts that make certain divisive issues important to particular shareholders. In this way, a compromise can be developed that will make all shareholders agreeable to the solution.

Summary
There is no one approach to a sale that is appropriate for all sellers. For an advisor to be consistently successful, he must be creative. An advisor that takes the time to understand your company, yourself, and your needs will be able to determine your “recipe for success”. This advisor should be able to sustain the positions that will satisfy your personal objectives and provide you a premium-priced deal.

When you are selecting your advisor, you should not be looking for the advisor with the most pleasing personality, nor should the length of time that you have known him be a consideration. This will probably be the largest transaction in your life, and the right advisor should add at least 10-20% to your transaction price. Apply those percentages to your expected transaction price, and then decide what characteristics are the most important to you. I think you will probably come to the conclusion the most important characteristics that you need in your advisor are: knowledge, experience, character, integrity and toughness. When you find these five characteristics, you will have found the advisor that will likely add 10-20% to your purchase price.