M&A
Advisory:
Guide to Selling a Business

Role of A Transaction Advisory Firm in an M&A

Many firms offer transaction advisory and diligence services for M&A deals. Identifying the right one requires asking the right questions and listening for the right answers. Below you will find tips for vetting and working with an advisory firm. You will also learn the correct way to approach several important components of a business sale. These include:

• Your readiness and strategy. This includes determining your motivations to sell, what must be done with your business before you entertain offers, and the best way to approach the process. You need to know what will get you to say “yes” to a deal because an offer may include provisions you are not planning for, but will they be deal breakers in your eyes?

• Thorough due diligence to eliminate surprises that could sink a sale.

• The potential for tax code changes in the future can impact what the best approach and timing is for some sellers. 

• Closing advisory to help ensure no surprises occur at the closing table.

Readiness and Your Deal Strategy

As a business owner, you are always thinking about tomorrow. You are constantly watching, planning, strategizing, and evaluating opportunities. This includes the opportunity to sell. One of the pitfalls of selling is waiting too long to start the process.

You can begin today by asking yourself: Why do I want to sell this business? Self-awareness is critical. Your buyers will want to know why you are selling, so you better understand it fully yourself. Your motivations underpin your timeline, the valuation process, negotiations, and keep you focused on what is right for you and your business. 

Communicate fully with your M&A advisory team what you ultimately want to get out of a deal. Your sale may be part of your succession plan, your retirement plan, or a plan for you to stay on in a new role with your company. You should also apply this thinking to others on your staff. A strong leadership team is a valuable asset in a sale. 

Another question to ask is whether you have the right legal structure for your company to achieve your goals. Your transaction and diligence advisory team can analyze this and help you make a change if one is required. When vetting advisors, ask about their experience with sales of companies structured similarly to yours.

Think Like A Buyer

Not all buyers are looking for the same thing in a business. You will be in a better position to sell if you understand the motivations on the other side of the table too. There are several different types of buyers you may encounter but they fit into two general categories: strategic or financial. 

Strategic Buyers

A strategic buyer is looking at long-term strategic value. They may want your business so they can improve their own with new capabilities, expand their customer base, or add additional service offerings. Acquiring your business may be part of a larger strategy that includes acquiring other businesses as well.

Typically strategic buyers come from the corporate development world and they may have well-established teams or outside consultants to concentrate on legal and financial issues that will come into play during an acquisition..

There are private equity (PE) backed strategic buyers who will be looking for specific things in your business. A PE-backed buyer may be able to move quicker because they already have a pool of funding and a vision for what type of business they are looking to purchase.

Financial Buyers

These buyers think like more traditional investors. They want to buy your company, hold it for a defined period of time, and sell it again for a profit. There are specific subcategories within the group of financial buyers. Here are several types you may encounter.

• Private equity firms have a fund committed to acquisitions. They may be focused on specific industries, end markets, or business sizes. You should understand the investment thesis of a PE firm and whether it will comport with your selling goals. 

• Venture capital is similar to PE but the funds are generally targeted towards startups or smaller businesses with the expectation that they will grow.

• Angel investors are generally individuals using their own funds for acquisitions. Likely, they will be looking for equity as part of their investment.

• A search fund backs an individual (often a recent business school graduate) as they pursue an investment.

• An independent sponsor is an individual who will partner with a private equity firm or a mezzanine debt provider once they have found a business to acquire. Keep in mind, they may be still raising capital for their purchase while they are in initial talks with you.

• A family office is associated with a successful business that is closely held. It sets aside money to diversify or create opportunities for the up-and-coming next generation. Each family office is unique, so it’s important to find out as much as you can about what a family office may be looking for in terms of their objectives, strategy, and timing.

One option you may be considering is a proprietary deal—where you work with a potential buyer who approached you in an unsolicited manner. There are unique pros and cons to these types of transactions and it’s important to have realistic expectations around a proprietary deal.

When searching for M&A advisors, make sure they have experience closing deals with all sorts of buyers. The breadth of this experience will help you position your company best. No matter what your deal strategy is, or who your potential buyers may be, make sure you have your M&A advisory team and legal counsel in place before you begin any of the due diligence work. 

Getting Your House in Order

Any potential buyer will have very specific questions and your answers will either put the buyer at ease or open up issues that could derail the sale altogether. Getting your finances and operations in order before taking your company to market is wise.

Each business must determine what this means for their unique situation, but an M&A advisor can help. They will know what potential buyers will be looking at most closely and can assist you in coming up with processes and a plan to put your best foot forward when you do start looking for offers. It’s important to have a sense of whether your company is an A-asset.  Should this not be the case, what practical solutions exist, and how would this discrepancy affect perceived value for potential buyers?

LOI to Due Diligence

Receiving either an indication of interest (IOI) or a letter of intent (LOI) from a potential buyer is exciting, but it can also be daunting. It puts you on the clock to finish your due diligence and make sure the negotiations move smoothly as you approach the closing date. The deeply technical due diligence process is where a transaction advisory firm can add tremendous value.

You should expect your buyer will have outside help in completing their due diligence so you will likely be up against experts in this area. An LOI must be dissected with extreme attention to detail. It could define complex parts of the deal like working capital, debt numbers, and how a transaction will be structured. If something around the LOI is overlooked the likelihood of a retrade is higher, or a deal could fall apart altogether. You would be taking on considerable risk by evaluating LOIs and proceeding with the required due diligence alone here. Because time and surprises kill deals, good M&A advisors focus on keeping things moving and being thorough.

When vetting advisory firms, ask what experience they have creating and analyzing financial statements, quality of earnings (QoE) analysis, and the many other documents involved in due diligence.

During this time, your buyer will be both looking forward and backward at your company. They will create forecasts, try to confirm synergy opportunities, and finalize a plan for integrating or running your business. Their comfort level with your data and documents will directly impact what they believe your company is worth and what they will offer.