Why is Choosing the Right M&A Advisors Important?

There are many institutions offering M&A services. For many business owners, they will sell their business only once, so making a good selection to best represent the interest of the owners and maximise the opportunity for potential acquirers is a major factor for success.

Data released over recent years have suggested that 80% of SMEs that are offered for sale don’t sell. There were a variety of reasons suggested for this. Perhaps the best qualification for being an advisor comes from actually having done it, perhaps more than once. They have lived through the experience, been through the processes and learned the lessons. International reach is also a significant advantage.

Choosing the Right M&A Advisor

The M&A advisors that achieve the best results for sellers are those with specialist knowledge in particular sectors. They can extract the intricacies of a business to maximise the value for the owners. They will present opportunities to trade buyers, venture capital or private equity investors with an understanding of the products, services and markets, therefore better promoting the opportunities the acquisition represents.

M&A Advisors’ Fee Structures

When choosing the right M&A advisor, look carefully at the fee structures. Most will charge a fee for the preparation of documentation. Some will want a monthly retainer. All will require a fee on completion. The Advisor that is confident of success in selling a business will start with a lower up-front fee, no retainers will be required, but they may have a slightly higher success percentage on completion. This final fee generally ranges from 5 to 10 percent, depending on the size of the deal.

The process for selling a small business is the same as for selling a larger one. The volume of work for the M&A advisor doesn’t significantly change from a £2m business to a £20m one. It’s likely that the success fee should be lower with a higher value sale.

The advisor will inform you of the volume of work that the business owners will need to undertake – this should not be under-estimated. Business owners know their businesses better than any outside advisor. It is for the advisor to collate all the information that is relevant to the sale and market the business directly and succinctly to potential acquirers with proven means to make an acquisition.

The Right Time to Sell?

There are many reasons to buy or sell a business. In the SME sector, a common factor is the owners have put many hours, days, weeks and years into creating a business that has enjoyed a degree of success and it’s time to cash in a take the reward. Retirement ambition is often a significant driver.

Conversely, it may be a struggle that prompts the desire to sell.  Allowing another party to bring expertise in and take the strain. Integration of one business into another which has more sophisticated routes to markets, established manufacturing infrastructure, stronger supply chain or more advanced administration. These attributes appeal to owners who can retain a stake in a combined business that accelerates improvements and sales growth of its products or services.

M&A Advisors’ Advice: Preparation and Exit Strategy

A good M&A advisor will assist with an exit strategy prior to offering a business for sale. Even if this delays the commencement of the sale process, a strategy to prepare a business for sale can lead to an enhanced value. Preparation is key to maximising sale process efficiency.

What are Buyers Looking For?

Buyers look to M&A advisors for many reasons; buying a competitor to reduce competition (horizontal or concentric integration), to obtain a wider product range into their existing markets (vertical integration), to enter new markets or bring on technological expertise, or enter into new markets through qualification or experience – to cite a few examples.

Who Buys Businesses?

Trade Buyers are other trading businesses that acquire another business to integrate or compliment their existing structure. A simple example would be a CNC machine manufacturer buying a software company specialising in CNC operational software or another manufacturer of complimentary products.

Venture Capital (VC) is a form of private equity financing that investors provide to SMEs which display the potential for significant, rapid growth. Capital is provided by private investors and financial institutions with the intention of making substantial returns. It is often accompanied by expert individuals representing the VC’s interests having a say in the control and direction of the business.

Private Equity (PE) firms facilitate investments on behalf of financial institutions or high net worth individuals. Investors’ funds are used to acquire companies with the objective of growing them and selling at some point in the future. They can be seen as having a longer-term view on investment returns when compared with venture capital.

What’s the Real Value of a Business?

One method of valuation is the Enterprise Value (EV) model which uses adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) multiplied by an industry multiplier. The multiple of EBITDA that is applied varies across industries and sectors. Adjustments to the EBITDA figure loosely cover those cost items that can be removed as irrelevant to the business post-sale. Examples include non-recurring items such as infrastructure modifications, legal or consultancy fees and salaries that will not be carried forward under new ownership.

However, it’s not wise to look at a reference table and assume that a particular business has a multiple of, say, 8X EBITDA. There will be a range depending on the recent performance of the business, industry trends, potential changes in legislation that may affect the business performance, technology adoption, and so on. There are many factors that can drive the multiplier up or down from an industry mean. If 8 is a mean figure, the multiplier for any particular business my be as low as 4 or as high as 12. Of course, any business is ultimately worth what another party is prepared to pay for it.

About FX Dynamics

FX Dynamics is a boutique Buy and Sell side M&A Advisory service business operating within SME Industrial and Energy related markets. Typical deal size ranges from £2m to £30m.

In the past, FX staff have been approached by several business owners requesting insight into how they had successfully sold both going concerns and asset ranges whilst being owner managers of their own businesses.

The owners of FX Dynamics have sold several businesses through mainstream M&A advisors and concluded that the process could be both simplified and clarified. A service based on the experiences of owning, building and selling was created utilising the extensive knowledge of international industry sectors to make direct approaches to the people in a position to discuss and act upon an acquisition opportunity.

FX Dynamics is a specialist M&A service that offers a very personalised service to clients and prides itself on quality of service rather than quantity of deals.

For further information, contact Clive Stanley:

01789 860000