The Role and Fee Structure of an M&A Advisor

Why Hire an M&A Advisor In the First Place?

It’s usually a bad idea for the entrepreneur selling a company to tackle the M&A market without help from an experienced M&A advisor. Retaining experience from an Advisor who is in the business of selling companies helps ensure that business owners don’t approach the sale process naively or ill-prepared. There are always rough patches in the process and a savvy advisor knows how to navigate them to help secure a successful outcome for the seller. The seller will have to pay for these services but provided the seller has selected a qualified advisor, the ROI is usually very high. The complexity and multiplicity of tasks, the immense distraction for a business owner of running their business while simultaneously trying to sell it, and the downside of going through an M&A process and coming up empty-handed, are among the key reasons to hire an investment bank.

M&A Advisor Fee Structures

The advisor’s biggest payout comes in the form of a success fee if / when the deal closes. The fee is usually based on the final price of the transaction, subject to certain terms and modifications. This so-called “success fee” is generally negotiated by the business owner and advisor when they commercialize their relationship. If the agreement calls for a set percentage of the price, the advisor has added incentive to maximize the value for the business owner.

Maximizing value doesn’t always mean a higher dollar price; value often comes down to terms other than price, more favorable earn-out structures, or perhaps a partnership with an exceptionally well-regarded buyer. A good example of how price and value diverge in the eyes of a seller would include selling a business to Warren Buffett’s Berkshire Hathaway. Many business owners who have sold to Berkshire have accepted smaller purchase prices in order to be part of the Berkshire umbrella.

In addition to a success fee, most established middle market advisors require retainer fees–either an up-front payment or a monthly installment–while the M&A process is underway. Aside from helping pay out of pocket expenses, the retainer assures commitment by the seller. “It’s a predictable indicator of the seriousness of the owner to follow through on the sale,” says Michael Goldman of New York-based TM Capital. Bill Weirich of Matrix Capital Markets Group in Richmond, Va., says it “cuts out a lot of people who just want to check to see what their company is worth.”

Vetting Your M&A Advisor

Sellers should carefully examine their potential advisor’s experience, reputation and competence before signing an engagement letter. Look for a strong track record of prior deals, testimonials from clients (always verified by a few phone calls) and high regard of your advisor by other M&A professionals. The more recently an advisor has been working in the same industry as the business owner, the better, as this often means they’re more intimate with various buyers.

Your Advisor’s Role at Each Stage of the Process

Preparing the Business for Sale

Considerable work goes into making the target market ready before the pitch book can go out. Clean financial information is critical. Goldman notes that private company financials may be accurate but have “missing elements,” such as forward-looking business plans or “narratives” to back up the data. Weirich insists clients have their financial statements audited and adjusted if the company traditionally has paid the owner’s personal expenses. Patrick Hurley of MidMarket Capital Advisors in Philadelphia wants to assure there is a “clear understanding of how the balance sheet connects to the income statement.” Beyond the financials, the advisor will want to assure that any physical facilities or locations look well-maintained. Weirich typically inspects facilities and sends clients a due diligence checklist of items to be examined and corrected if necessary. Ensuring that any key customers and suppliers are on board if the selling company changes hands is another vital task, as any buyer will want some degree of assurance that existing customers will remain in a change of control.

Going to Market

In the most visible portion of the process, the advisor “takes the owner’s company to market” and chooses the route that maximizes the chances of success for the business owner. Frequently, that involves some form of process by which the various buyers are contacted and asked to indicate interest at increasing degrees of commitment and seriousness. The advisor should be able to manage this process efficiently, including qualification of the buyers based on expertise, demonstration of seriousness, and capital available to close the deal. Depending on time requirements and special features of the target, a knowledgeable advisor may determine it is better to “show” the property to only one or two potential buyers; in other cases, the advisor may suggest a broader approach. No two processes are the same and therefore should not be treated the same.

Whether approaching a large buyer population or a few, the M&A advisor prepares confidential information memorandum (CIM) documents, often called “the pitch book,” that include significant financial, operations, and strategic information about the selling company.

Closing the Deal

Finally, a selling client should be confident the advisor can help with final negotiation of deal terms, including structures, currencies, escrows, reserves and other key issues. If it takes contingent payments to get the deal done, the advisor should be able to guide those decisions. If non-price considerations such as non-compete agreements are critical, or if an employment or consulting contract for the selling owner is needed, the advisor should help formalize those elements as well.

Want to learn more about M&A firms and how to work with them? See “How to Choose an Investment Banker.”

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This featured guest post is written by Martin Sikora, former editor for 23 years at Mergers & Acquisitions Magazine, and a lecturer on M&A at the Wharton School of the University of Pennsylvania. He has been a business and political journalist for more than four decades and is co-editor of the Mergers & Acquisitions Handbook and the Change Management Handbook.