Why hire an M&A advisor? Making the Market

Shane Hubbell

July 1, 2022

Welcome to Alkali Insights: M&A Musings and Advice

In the capital markets, preparation is paramount. If you’re preparing to sell or considering a sale in the future, you need to engage an M&A advisor now. A skilled advisor helps you see your business through the lens of a buyer today, so you can make strategic operating decisions tomorrow. With planning and foresight, you’ll be ready when opportunity calls.

Making the Market

Negotiating a deal requires considerable time and demands expertise in making a market. Founders who go it alone often only have the capacity to generate and entertain one offer at a time. Not only is the process inefficient, but it can result in a final valuation far below a company’s real value. This is because there’s no market, as it’s just a single bid. Worse yet, most buyers only close one in seven bids. An experienced M&A advisor, however, can create a viable market that enhances price discovery.

It’s Not Just an Exit

In any deal, someone’s exit is someone else’s entrance. While founders may know their companies inside and out, most don’t understand the potential buyer’s business. Without knowing what motivates a buyer, founders miss opportunities to position those concerns and realize maximum value.

Qualified M&A advisors know how a buyer’s business works. They understand the company's metrics, value propositions, and depth of potential prospects – strategic and financial.

Advisors know how a company’s history shapes the buyer’s view of the future. They also manage buyer due diligence and guide sellers through potential concerns and deal making nuances.

When most founders plan an exit, they’re understandably concerned with what happens to the company after the deal is closed. Common questions include:

  • Who’s the best steward to leads product strategy?
  • Will the new buyer provide the same level of service to clients?  
  • What will happen to the employees?

M&A advisors understand that founders have distinct requests for their company’s future post-exit. An advisor will help the founder define their definition of a successful transition, then craft negotiations with those requirements in mind. 

Arriving at the Correct Valuation

Over 70% of valuation data is non-public, and the remaining 30% is often inaccurate. As a result, most founders tout an arbitrary, irrelevant, and inaccurate set of comparables in the hopes that buyers will take their word for it. While nobody has perfect information, most buyers have more pricing information than sellers from participating in many acquisition processes per year. With millions at stake, buyers will do their own valuation research.

A company is worth what the highest bidder is willing to pay.

Here’s a common story we hear from acquirers: 

“The company chose not to use an investment bank. It was a proprietary deal! We had a good relationship with the founder, so we convinced them not to talk to other buyers. The founder thought customer retention was 70%, but after our research, we realized it was over 95%. They reported earnings at $7 million, but after normalizing, earnings were closer to $10 million. We bought for $35 million, or what the founder thought was 5x earnings, but we could easily resell it today for over $100 million. Let’s just say our investors are happy with us right now.”

In contrast, M&A advisors leverage their market knowledge to guide buyers through price discovery– allowing the market to set the price. Along the way, M&A advisors restructure the deal to commercially reasonable terms. 

Founders know their company has value, but most sell themselves short. An M&A advisor tells the seller’s story, articulates accurate value, and creates opportunity for potential buyers to bid against one another. In the end, an advisor’s goal is finding founders the best corporate partner and negotiating the greatest deal.

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