Shoe Shopping is Fun. Forum Shopping for an M&A Advisor is Stupid.
Dear Business Owner,
I know you are smart and talented. How would you have built this impressive business if you were not?
I know you are used to making the difficult decisions. How would you have survived as a leader if you were not?
I know that selling your business is a huge, emotional decision. It is easy to see why you may be tempted to forum shop for an advisor.
Selling your business is a difficult decision on its own. Finding the right M&A advisor can be another difficult layer added to the process. The real problem with selecting the right advisor is finding the one that isn’t simply telling you what you want to hear. Shady investment bankers and M&A advisors are notorious for listening to potential clients describe the value they want for their business and magically, when their valuation of the business is done, it is that very same number. It is easy for those same advisors to tell an entrepreneur to ignore critical issues in the hopes that they get hired and that things get so far along in the sale process that they are willing to overlook a change in valuation once the deal is actually happening.
This is no way to run a railroad and not what you want out of a business advisor. Having a “yes man/woman” on your team doesn’t do you any good. In fact, you will make bad business decisions that can harm you and the business.
When you interview potential M&A advisors, look for firms that understand your company and your market. Look for firms that specialize in businesses like yours. Remember, they do a lot more transactions than you do and will have a better handle on what the real value of your business would be in a sale process.
Ask other professionals about their experiences with M&A advisors. Was the price they got the one that the M&A firm told them they would receive? Ask lawyers who work in the space which firms do a good job and know what they’re doing. Do not simply pick a firm because they gave you the highest valuation.
Good M&A advisors will alert you to the good things about your business that will impact the market reception in a positive way, as well as the bad things that may detract from value. If an M&A advisor doesn’t address any bad things with you, back away from the table. You need to hear the bad stuff too. Most issues with a business can be dealt with during a transaction but there are some, like customer concentration, lack of manufacturing capacity, a slow down or downturn in business growth, that will need to be worked through and will impact value. You may want to wait until these are resolved, and a good advisor will be OK with that.
If you have customer concentration and have lost money for the last two years (or any other list of negative things that impact valuations) and your M&A advisor doesn’t bring this up during the pitch, don’t hire that firm. They either didn’t ask the right questions, didn’t pay attention, or are hoping you get wowed by the glowing description of your business and the high valuation they feed back to you.
This is the financial equivalent of the emperor with no clothes.
All businesses have issues and a good advisor will tell you what the market will pay, not what you want to hear.