I’m on my way to Florida where I’ll be for the week. I’ll be working with quite literally hundreds of shop owners and paint distributors on identifying ways to grow their business. We will be discussing M&A, financing growth, portfolio theory, how to maximize price in a sale, and general corporate strategy. This is a really powerful group, organized by one of the largest paint manufactures in the world. I’ve worked with this group before, and am always impressed by the level of dedication and focus the members bring to these meetings.
As I’ve been preparing for my meetings this week, I have found myself contemplating my role in the process, and specifically the value-add an M&A advisor brings to a business. More specifically, for whom and when does it make sense to bring on an outside advisor. Because to be frank, an M&A advisor is not right for everyone.
Note: If you are travelling to, or reside in Florida, hit REPLY and shoot me an email. It would be great to meet face to face. I’ll be in the Fort Myers area.
When engaging an outside M&A advisor, one significant value-add advisors bring to the table is market intel. For example, an operational consultant in your industry likely knows the operational metrics of your best competitors. An experienced attorney likely has insight into recent case law that may impact your specific situation. A tax advisor likely keeps abreast of changes to the tax code that may have a material impact on your business. An M&A advisor will know the major buyers in your market, pricing trends, and what different buyers look for in a transaction. And while industry gossip and water cooler chat may be titillating, the reality is that the vast majority of industry gossip is just that – gossip from someone who heard something from someone who wasn’t involved in the deal. An experienced M&A advisor will bring the knowledge of actual closed transactions to the engagement.
In the vast majority of M&A transactions of privately held companies, there is substantial asymmetry between buyer and seller. Most buyers of privately held companies have acquired many privately held businesses in their respective industry. In collision repair, the largest buyers have completed hundred upon hundreds of acquisitions. The same holds true of paint and parts distribution where the most acquisitive companies have closed hundreds of millions of dollars in M&A transactions.
In this environment, the seller is at a substantial disadvantage over the buyer. The buyer not only has the internal market intel, but also pre-existing relationships with professional advisors to get deals done. For every deal the buyer has done, it has likely looked and passed on many more. In this process, the buyer develops deep expertise, and learns very quickly what levers to pull to get deals done in their favor.
Bringing out outside M&A advisor with domain and industry expertise helps even the tables and ensures not just that deals get done, but that the right deals get done at the right price and right terms.
Bringing on an outside M&A advisor is much like buying insurance. One of the most overlooked benefit of an outside advisor can be assigned to what psychologist call the Hawthorn Effect. The Hawthorne Effect simply states that individuals modify their behavior when they are aware they are monitored. There is a variety of literature that points to the fact that deal outcomes are better when an outside M&A advisor is brought in. At the most basic level, an outside M&A advisor signals to the other party they are being monitored. In short, this keeps the other party honest. This likely explains why even sophisticated investors with great market intel and unmatched sophistication like Warren Buffett, Carl Icahn, and Henry Kravis continue to turn to outside M&A advisors when they buy companies, sell companies, and raise capital.
The more aggressive the growth plans, the more it makes sense to bring on an outside M&A advisor. Many of the benefits of bringing on an outside M&A advisor are very applicable to companies considering a sell-side transaction. Due to the nature of sell-side engagements, an owner only gets to sell that company once (but sometimes twice) so maximizing every advantage is critical, especially when opposite a more experienced and sophisticated buyer. But for companies looking to grow rapidly this holds true as well.
Outside M&A advisors provide a sanity check to prices and terms paid in a transaction. As the M&A advisor would like to complete multiple buy-side transactions with their client, the advisor has a vested interest to ensure that the client is able to successfully acquire, and integrate, the target company. Bringing on advisors in general makes more economic sense for companies that are in growth mode as the company can spread the costs of the advisors over an increasing base of sales. And, as the enterprise grows, outsourced advisors allow the company to continue to grow like a consolidator and focus on the core competencies it has developed to date.
If you think now is the right time to bring on an outside M&A advisor, get in contact with me (subscribers hit REPLY). Our passion is guiding business owners through business transactions, whether that be buying a business, selling a business, or raising capital. Our conversations are always confidential.
Until next week!