Mergers and Acquisitions For Dummies (28 page)

Find the right-sized firm for your company.
M&A transaction experience is a must, of course, but an advisor should specialize in working with companies the size of your company.

Consulting wealth advisors when you're ready to sell

A
wealth advisor
is a person who manages other people's money. But I don't merely mean a stockbroker. Most financial services firms have a specific department or division designed to work with wealthy people. These advisors consult their clients on a wide array of issues, ranging from investment choices to estate planning to tax strategies.

Selling a business can generate a great deal of personal wealth, and working with a trusted advisor to help manage and shepherd that wealth is an important consideration during the M&A process. An advisor worth his salt can advise Seller on a preferred structure, one that minimizes taxes and/or moves wealth to the next generation.

Sellers should sit down with a wealth advisor before embarking on the M&A process, especially if they're contemplating retirement. As amazing as it may sound, Seller may discover that the lifestyle he wants to lead post-sale requires less money than he previously thought with some specific planning rather than back-of-the-envelope guesswork.

Pick your wealth advisors very carefully. The dirty secret of many firms, even the largest, most well known, household name firms, is much of the work is done by junior people who don't have any wealth, don't know much about investing, and may not even care that much about your goals and plans and desires. Because managing wealth isn't so much about your future but rather the future of your children, grandchildren, and charities — your legacy, in other words — choose your advisors carefully.

Considering an intermediary

An
intermediary
is a person who represents Buyer or Seller in an M&A transaction. Commonly called
investment bankers
or
business brokers,
this breed of M&A advisors is essentially salespeople, and what they're selling is a company. The intermediary is often the quarterback during the M&A process, and Buyers or Sellers thinking about hiring an intermediary should look for deal experience, demeanor, confidence, business understanding, creativity, and accounting skills when hiring that quarterback. The following sections look at how intermediaries operate for each side and how the two main varieties differ.

Understanding an intermediary's role

For Seller, an intermediary is the one who helps execute the M&A process I lay out in Chapter 3, including contacting buyers, structuring the deal, and performing due diligence. The intermediary can also be the voice of reason for an otherwise-emotional Seller. The business sale is likely to be the largest transaction of Seller's life, and he needs someone who isn't emotionally tied to the business to represent him. (That's why Sellers should never represent themselves in a sale.)

For Buyer, an intermediary is the one who does the most difficult of jobs: contacting Sellers (flip to Chapter 6 for more information) and getting the appropriate information for Buyer's offering document (see Chapter 8) and due diligence (see Chapter 14). Depending on the needs of the client, the intermediary may also help with the negotiating and structuring of a deal, although many Buyers who utilize an intermediary for help with finding targets prefer to do the negotiating and structuring themselves.

Most Buyers (and their advisors) these days review the copious amounts of data generated by due diligence in a secure, online data room, so when hiring an intermediary, make sure that person is well versed in online data rooms.

What the intermediary doesn't do is hammer out all the details of the purchase agreement (that's for the lawyers) or go through all the books in order to perform a comprehensive financial analysis (that's the job of the accountants).

Buyers should note that Sellers are usually extremely reluctant to speak to a competitor or a company they perceive as a competitor. For that reason, using an intermediary can be a very useful buffer when contacting Sellers. A Seller is more apt to talk with an intermediary and quite often more willing to open up and provide quite a bit of information.

Knowing the difference between a business broker and an investment banker

Intermediaries come in two flavors: investment bankers and business brokers. An
investment banker
likely provides a fuller service for a Seller, but that fuller service usually means higher fees. Investment banking firms are more expensive because they have more overhead. In other words, they have more professionals (including specialized employees such as business development teams, researchers, and a host of analysts) and often fancier offices in fancier buildings. All those extras cost money.

In a very rough sense, the revenue threshold for working with an investment banking firm is $10 million. Companies with revenues north of $10 million will most likely be able to afford the fees associated with a full-service firm.

For companies under $10 million in revenue, a business broker probably makes the most sense; transactions that small probably won't interest an investment firm.

A
business broker
does much of the same work as an investment banker does, just with fewer people and lower overhead. In some cases, the broker is the person who signs the new client, writes the offering document, conducts the research, develops the target list, makes the calls, organizes the meetings, and negotiates the deal. The broker can charge a lower fee and still make a good living, but the extent of the service won't be the same as a larger firm, simply because the larger firm has more resources.

Brokers are more apt to work on a
contingency basis
, meaning they're often willing to only get paid if a deal successfully closes. Investment bankers probably will require an initial retainer, monthly fees, and a success fee.

Due to recent changes in securities laws, both Sellers and Buyers should work with an intermediary that is affiliated with a regulated investment firm (called a
broker-dealer
).
Any individual involved in transacting an M&A deal needs to be registered with the Financial Industry Regulatory Authority (FINRA). Basically, this entity makes sure people involved in securities transactions haven't committed financial crimes and also have a certain level of financial proficiency. To become registered, an individual needs to pass a couple of securities exams — usually, the series 7 (or 79) and series 63.

When hiring a firm to conduct an acquisition search make sure you ask who is making the calls to business owners: an experienced professional or some kid straight out of business school? Some M&A firms that focus on acquisition search work are little more than what I call “dialing for dollars shops.” Often these firms utilize the boiler-room approach — that is, packing a slew of young people into a room and having them make call after call after call with little or no thought about what they're saying or to whom they're speaking.