We come across this question quite frequently, where companies feel that they possibly have the in-house skills to go it alone, or that they find it difficult to justify the advisory fees – whether it is company sales/purchases, management buy-outs (MBO), management buy-ins (MBI), or selling/buying shares, such as in raising new capital.

We believe that the answer in most cases is emphatically yes, to not only maximise value in the transaction, but to take the pain out of the process, and to minimise the distraction of the transaction from the demands of the day to day business.

The skill of a Transaction Advisor is in managing the process of buying or selling a company or its shares (“buy side and sell side”), something that most executives may experience a couple of times at most in their professional career, whereas for an advisor it is one of many in a year.

INDEPENDENCE & AGENDAS

Of course, professional investors will experience buying and selling many times over, but their role is to get the best possible deal for themselves as the new investor. Whilst the investor may be fair and even generous in aligning management incentives with their investment goals, it would be unlikely that the investor would be generous to all parties, specifically incumbent shareholders who are not necessarily managers. By definition the lower the price that an incoming investor can achieve, the lower the risk and the better the return on investment.

All parties have agendas that are not necessarily aligned, and the importance of an independent Advisor is therefore obvious. The Advisor manages a process and is therefore by definition also a project manager.

INDUSTRY KNOWLEDGE

Transaction Advisors do not have to be industry experts. Indeed, most investment banks have specialist divisions but they will not necessarily have run a business in the industry. Make no mistake, however, not understanding an industry does not make an investor naïve. Industries have specific investment characteristics that allow investors to cut to the core issues very quickly.

However an Advisor with a deep understanding of a sector can add tremendous value in certain cases, such as the sale of a company to a strategic investor. The strategic positioning of the business within an industry is almost always as important in achieving the best valuation as the financial results. Also, suitable investors can be identified more quickly, and potential issues identified earlier.

HOW A TRANSACTION ADVISOR CAN HELP

A Transaction Advisor can help in a number of ways:

Valuation is a very difficult topic and, in our experience, can be influenced by emotion on all sides. It is not uncommon for a business owner to have strong views on valuation, which need to be robustly tested not only for the owner but in order that investors are comfortable. An Advisor can give a clear view on likely valuation ranges (valuations are rarely a single number, and usually heavily influenced by the reason a buyer has to buy). A good Advisor will seek out the reason that a buyer will pay more (for a sell side mandate) or find reasons for the price to be reduced on a buy side mandate. Another key consideration is that the ultimate sale value is not merely a price but also the terms of sale (profit warranties, etc.).

Strategic positioning is critical in the valuation discussion, both from a buy and sell perspective. An Advisor that understands the industry in depth is likely to be able to help with this positioning. Of course, this positioning is not simply something that one decides anew on a morning; it needs to be developed over a period. To be the winner in a declining industry does not hold the same attraction as a disruptor with a record in a growth industry and changing direction or, at least, considering the merits of a change require time and also good advice.

Negotiation is made more clinical by a good transaction advisor. A good Advisor will allow the principal to make decisions in an informed and time-sensitive manner by ensuring that information is readily available and providing a layer between the parties. Ultimately the deal must be done between the two principals, however there are times when debates may not always result in a positive relationship – the same relationship that is key to the future of partners in one business. The Advisor acts as a buffer to harsh feelings.

Transactions are usually lengthy processes and consume time for executives, particularly owners. The distractions of the process can actually cause tensions between the shareholder and executive team. The business must carry on growing whilst this process is happening and therefore a Transaction Advisor helps by dealing with the multitude of issues that need to be effected right through the process.

Competition is an important function that an advisor manages. By ensuring that there is at least a perception of competition, two critical objectives are achieved:

• Price – a buyer that is convinced of the investment’s merits may be persuaded to increase their price if they are concerned that a competitor may offer more.
• Time – perhaps the most critical role that an Advisor plays is to keep the process moving along. If a potential buyer has the luxury of time, they are able to observe the business and the executives and take a view on their likely future without really being pushed to make a decision one way or another. If an advisor puts a process in place, and there is competitive tension, it goes a long way to ensure closure.

Risk identification and mitigation – Advisors are themselves often investors, and in any case look at any project with investors’ eyes. A good Advisor can identify likely risks that are going to become an issue during the sale process and help to mitigate the risks, either through merely identifying them or even suggesting steps to mitigate the perception of the risk in the potential investors’ eyes. It is far better to have these risks made obvious up front than for the investor to ask about them at the back end of the process. It also helps to flush out unsuitable investors who perhaps don’t understand the industry and the inherent risks thereof.

Due Diligence is an activity that should be carried out AFTER binding agreements have been signed. However, our experience has been that it is common practice for certain investors/ acquirors to request detailed information early in the process if the discussion is directly between the principals. This allows them to push harder on pricing and terms right to the end of the process when there is little room for the seller to move, either in price and terms or critically, emotionally. Due diligence is an activity that needs to be scope limited and time bound; however, in order to achieve this, a seller needs to have its information memorandum and data room well stocked with relevant and appropriate information. Being able to define and control the scope and timing of a due diligence process carried out by a potential acquirer/investor is a critical skill of an advisor.

A good Advisor would protect information and intellectual property until binding terms are signed. Most banks and auditing firms have transaction advisory arms. This is because advisory may be complicated, requiring specialist tax, financial analysis or legal skills. An Advisor needs to be able to identify such needs and bringing in specialist skills to complement its in-house skills.

If you are considering a process to sell shares or even the whole equity in your business, it is important to start with a clean-up of the company legal structure and accounts, ensuring that you are compliant with tax and other statutory matters. Your auditors and legal advisors can help with this.

The real question is not so much “do I actually need a Transaction Advisor” but rather “which Transaction Advisor will best represent my needs”.