Friday, 18 November 2011

How Does an M&A Advisor Add Value to the Divesture Process?

M&A advisors typically charge between 3% and 7% as a success fee for managing the sale process for a company.  The contingent structure of a success fee means the advisor gets paid a nominal percentage if the deal is satisfactory to all parties.  Sounds reasonable.  The percentage, while small, can amount to hundreds of thousands of dollars and, when viewed in this light, vendors begin to question the value for money.  So the question is, is an M&A advisor worth, say 5% of the realized amount or, in other words, will engaging an M&A advisor improve your expected value by at least 5%?
The alternatives to working with a trusted advisor typically fall in three buckets: (i) respond to an unsolicited offer; (ii) approach other members of the existing management team or, (iii) approach a competitor.  Veracap's Value Enhancement FrameworkTM enables business owners to realize their personal and financial objectives by introducing appropriate planning and execution strategies in undertaking the sale of their company.   The chart below illustrates that opportunities for value enhancement are created through timing the sale, preparing for the sale and valuation and pricing initiatives. It demonstrates how to realize on the value that has been created through building deal momentum in the search for buyers, preliminary due diligence, deal structuring, negotiations and closing.

So will engaging an M&A advisor improve your expected value by at least 5%?  While I do not have empirical evidence to present, I can say that most of the time we see at least a 5% improvement between the average acceptable expression of interest and the signed LOI.  I have also seen this difference be as high as 100%.  The price improvement during the managed auction process will be the greatest when you have at least two interested parties at the table who both have plenty of room above the intrinsic value of the business to the value to the buyer (see What Will a Strategic Buyer Pay?).  
The main difference between the Veracap framework and do-it-yourself alternatives is that the latter are typically reactive as opposed to proactive.  An M&A advisor will: (i) position the selling company as a strategic fit for target buyers; (ii) present the opportunity to numerous logical and capable buyers; and (iii) manage the process along a defined and orderly timeline, in order to generate the highest premium possible.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

1 comment:

  1. Mergers and acquisitions also known as "M&A" is the procedure of consolidating or mixing two organizations into one corporation. A directly purchase is simply when one organization buys another organization overall. Usually, this deal can be made in inventory, cash or a mixture of both.

    M&A Advisor