ARTICLE:

The True "Value" of the M&A Intermediary

By

Gerald F. Toth, Jr.
Managing Director/President
Capital & Acquisition Advisors, Inc.

Introduction

When the decision is made to sell, some business owners believe the preferable route is to "go it alone" and not utilize the services of an M&A Intermediary if at all possible. Most M&A Intermediaries have heard a variety of reasons from private business owners to rationalize not utilizing professional M&A services, but normally at the head of the list are three "seller-objections" paraphrased below:

• "Why should I pay an M&A Intermediary fee if I can sell my company on my own?"
• "The only value an M&A Intermediary ‘brings to the table' is identifying a buyer."
• "I don't want to pay an M&A Intermediary fee because whatever the fee is it will reduce my sale proceeds."

While some private owners do, in fact, sell their businesses without utilizing an M&A Intermediary, in almost every case they are shortchanging themselves. The discussion to follow is intended to address (refute) these three frequently voiced seller-objections.

M&A Intermediary Fees vs. "Value Created"

All three seller-objections noted above often are interrelated. Without question, owners of successful businesses are approached directly by prospective buyers to sell their business. But even if a prospective buyer does make an offer that may initially be thought of as "acceptable" or "very good" from the seller's perspective, the first alternatively stated questions any experienced M&A Intermediary is likely to ask of the seller are, "Was the offer you accepted the best offer available?" or "How do you know if you left something (or a lot!) on the table?"

In virtually every business sale transaction – both large and small – unless the seller has multiple viable sale alternatives at the same time and the buyer is aware of real or perceived competition from other buyers, the seller will invariably be at a negotiating disadvantage. To address this economic law of nature one of the most critical roles the experienced M&A Intermediary plays is to create competition to drive up sale value for the seller's benefit. And in addition to the nominal selling price, "sale value" also includes other "soft" terms and conditions normally of great value to the seller (e.g., limiting warranties, devising or "tinkering" with transaction structures that minimize taxes, etc.).

Unless a seller's business is very distressed or otherwise is an unattractive acquisition candidate, a good M&A Intermediary is not overly concerned with any one particular buyer because there normally will be several or many potential buyers for good businesses. And even when there is one buyer clearly at the head of the pack, a skillful M&A Intermediary usually can still further improve the best offer already on the table. Finally, in addition to generating the "best" transaction available through a competitive business sale marketing and negotiation process, the experienced M&A Intermediary provides a very important secondary benefit to the motivated seller, namely, identifying one or more "backup" buyers. Backup buyers are always important to the motivated seller in the event that the preferred buyer withdraws from the sale transaction due to unforeseen or unresolvable issues arising during the due-diligence, financing, or legal documentation phases of the sale process.

Value Created Besides Generating Multiple Competing Buyers

For the reasons just stated (i.e., primarily buyer competition) and almost regardless of what the M&A Intermediary's fees are, the incremental increase in sale value an M&A Intermediary brings to the sale transaction is normally many multiples of the intermediary's fee itself. This reality is further supported by the obvious fact that even the largest multinational corporations, which have substantial internal corporate finance staffs, rely on M&A intermediaries / investment bankers to manage all of their acquisition and divestiture transactions.

But apart from creating increased sale value by more than many multiples of the M&A Intermediary's fee (i.e., essentially a "no real cost" proposition for the seller), experienced and highly professional M&A Intermediaries bring additional "tactical" value-added elements to a business sale transaction by:

• Objectively estimating "business sale value" in the real world of the M&A marketplace as opposed to the hypothetical world of the business valuation consultant;
• Skillfully "positioning" a business sale candidate in the M&A marketplace to broaden the potential universe of buyers, and devising custom-tailored strategies and tactics to maximize sale value;
• Optimizing transaction structure to maximize after-tax sale proceeds…not simply maximizing stated or implied pre-tax sale transaction value;
• Facilitating transaction negotiations by releasing "trial balloons" and "testing" terms/conditions that if posed directly by a buyer or seller could "paint them into a corner" as "committed" positions;
• Preparing sophisticated and detailed financial projection models, and providing other analytical data that justify the sought sale value and preemptively negating a buyer's predictable first reaction that the "sale price is too high";
• As the term "intermediary" implies, successfully mediating issues initially thought to be non-negotiable "deal breakers" or "logjams" and otherwise facilitating a "win-win" transaction from both parties' perspectives;
• Even while representing the seller, a good M&A Intermediary can provide valuable assistance to buyers, helping them structure the financing necessary to close the sale, providing introductions to financing institutions, private equity / mezzanine groups, etc., when asked; and
• Reviewing legal documentation and providing an "early warning" system to both parties to modify documentation language or provisions that are either not within either parties' intent in the sale transaction or that will knowingly be upsetting to either party.

While the experienced M&A Intermediary brings the tactical value-added elements noted above to the business sale transaction, the effective M&A Intermediary also provides substantial administrative or logistical value to the seller. For example, M&A Intermediaries provide an important "screening" function by sparing the seller's valuable time of having to deal with financially unqualified buyers and/or the emotional distress of buyers offering either insulting "low-ball" offers, unrealistic financing structures, or other unattractive purchase terms. Another important administrative value the M&A Intermediary provides is shielding the seller from repetitive information requests from multiple prospective buyers. Other additional and important administrative functions the M&A Intermediary provides include arranging / coordinating: management visits, plant tours, fixed asset appraisals, bank field audits, insurance issues, environmental or other consultant involvement, both on-site and off-site buyer due-diligence matters, and other general transaction management issues.

Maximizing "Transaction Efficiency"

Beyond the tactical and the administrative value-added elements discussed above, from a very basic or pragmatic viewpoint most private business owners simply do not have the time to sell their business in a value-maximizing manner while still "keeping their eye on the ball" running their company. And equally as important as the scarcity of available time, most owners of middle-market businesses do not have the technical expertise, practical "hands-on" experience, or internal resources to effectively execute a professional business sale strategy and a methodically efficient sale process. In short, selling the privately owned commercial / industrial business is a highly technical and demanding full-time job invariably best left to the professionals.

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© 2005 by Capital & Acquisition Advisors, Inc.

Capital & Acquisition Advisors, Inc. (CAA), is a Chicago-based investment banking firm providing merger and acquisition (M&A), acquisition / restructuring financing, and business valuation services to privately held middle-market companies nationwide. CAA's "Chemical Acquisition Services" division provides merger and acquisition services focused within the industrial / specialty chemical industry.