From Due Diligence To Deal Completion: The Ultimate Checklist For Selecting A Mergers And Acquisitions Advisor

The stakes are high when it comes to choosing a Mergers & Acquisitions (M&A) advisor. Most entrepreneurs work toward the sale of their companies for years, decades, or even their entire careers, so making a poor choice in your M&A advisor can have a large negative impact on the transaction outcome.

However, with the help of the right person, you can feel confident about getting the best outcome for your years of hard work and dedication. With so much riding on the outcome, it’s important to slow down and weigh who will be the best M&A advisor for you and your company.

Experience Matters

Good M&A advisors will have a deep background not just in business but in M&A specifically. Not many corporate advisors have much experience in this particular aspect of business — even most long-time industry leaders and entrepreneurs lack the necessary knowledge and experience to execute an M&A transaction. Selling a business is a complicated matter that requires specialized expertise.

First, be sure to vet your potential advisors with an eye to how many M&As they have guided and consider the magnitude of their success. Has this person participated in a diverse range of M&A transactions? Have they been entrusted with big-name sales? No two M&A deals are the same, so a rinse-and-repeat approach is seldom optimal.

When interviewing possible M&A advisors, ask the tough questions: How would they handle difficult situations like losing a major customer? How would they manage the net working capital discussion? What due diligence would they conduct when rolling over equity? How would they recommend structuring earn-outs?

Choose An Agile, Diverse Team

M&A advisors commonly operate in conjunction with an entire team. The senior advisor on the team should have a robust portfolio of previous successes to their credit, while the junior members should have at least five years of diverse M&A experience.

The team’s experience doesn’t need to be specific to your company’s industry. Successful advisory firms prioritize your company’s specific needs and match them with teams according to their skill sets and strengths. In my experience, teams with more diverse experience tend to be more flexible and creative than those who are entrenched within a particular industry.

While some advisors will try to persuade you that their existing contacts with buyers are key, this element is also overrated. Buyers do not make M&A decisions based on personal relationships, they choose to buy a company because the deal makes business sense. In the Internet age, any advisor can find the right prospects and connect you to them effectively with access to certain databases.

Choose Wholehearted Advocates

The right M&A advisor should understand your business on a fundamental level in all of its complexity. Every deal is different, and a successful sale depends on the buyer’s perception of your company’s value.

When sitting at the negotiating table, your advisor will need to communicate that value from every possible angle. They should help you provide empirical or quantitative evidence of your company’s worth, like your company’s past financial performance and ownership of important intellectual property.

Furthermore, they should be able to speak about the many subjective, intangible factors that make your company valuable, such as its potential for growth, the talent and skill of its team, its market position, and trends within the industry. Only an advisor who truly intuits and appreciates your enterprise will be able to do this wholeheartedly and persuasively.

Determine How Much Support You Need

Some M&A advisors will help you every step of the way, and others will require you to do most of the work yourself. The former will research and negotiate for you, as well as develop financial forecasts, assess industry trends, and conduct a Quality of Earnings Analysis. The latter will hand you general frameworks, empty templates, and basic directions, but will otherwise leave it to you to gather information and build your own case.

One benefit of a full-service M&A advisory team is that they can free you up to focus on your business and help ensure it remains profitable. This is especially important while courting possible buyers as any disruption to the business can give them second thoughts.

In addition, consider the M&A advisory team’s current workload. If they’re working on more than three at once, they’re already spread thin. Make sure the firm you choose has the bandwidth to give you and your company the time and attention you need.

Work With Healthy, Collaborative Advisory Teams

Some M&A advisory firms are set up such that the senior bankers are independent contractors under a “eat what you kill” model, while others constitute true partnerships. For the former, team members are compensated as individuals, which incentivizes them to look out for their own interests. This approach has a tendency to deprioritize firm-wide teamwork and collaboration.

For the latter, team members share successes and are compensated equally, which encourages cooperation and a healthy workplace culture. The whole firm is incentivized to help each other to ensure the best possible outcome. That’s why I recommend choosing M&A firms that follow the partnership model.

Be Aware Of Success-Based Incentives

In his bestselling book “Freakonomics,” University of Chicago Economics Professor Steven Levitt exposed how success-based fees lead to lower sale prices in real estate. Since realtors get paid at closing, they are incentivized to close as many deals as they can, which encourages them to sell clients’ homes more quickly than they do their own. They are willing to wait longer when selling their own home because they have a financial incentive to go after a higher price.

The same applies to M&A advisors. Firms with a success-based fee structure will be more inclined to keep cash flowing by selling as fast as possible. Conversely, firms that are paid by the hour have no disincentive from giving you their best advice, even if that means a longer process. Success-based fees also tend to be much more expensive, so if the business is performing well and owners have a clear intent to sell, considering alternative fee models that are time- and materials-based could be a favorable alternative.

Keep in mind that firms with success-based fees may include “tail period” clauses in their contracts. This means they are entitled to a payout when you sell your company, even if your relationship with them sours and you close a deal through a different advisor. If you sever your connection with an hourly firm, you don’t need to worry that they’ll come to you for money when you sell your business.

Success-based fees are the norm in the investment banking and broker industry. So being aware of the pros and cons of the approach is important for sellers.

Your Turn

You’ve put your heart and soul into your company. Now, it’s time to give it its best chance to succeed during the M&A process. By following these tips, you can choose the right M&A advisor and ensure a positive experience.