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Critical Element For Success: The Advisor

George Spilka
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If you are considering selling your company, your situation is analogous to a person facing major surgery. The most important decision is who will perform the operation. That decision will likely determine if and how quickly the company returns to complete health. The critical decision before proceeding with the sale process is: “What investment banking/advisory firm (advisor) should I retain to handle the transaction?” This decision will likely determine whether a premium-priced deal with minimal risk to post-closing liabilities can be achieved. If you are the owner or CEO of a middle market company (defined as a company with a transaction price between $2 million and $250 million), the importance of this selection is probably even greater due to the relatively small number of advisors who effectively serve the middle market.

An advisor should have an open and verifiable track record. He should be willing to discuss any non-proprietary information related to a prior deal, except for the transaction price and deal terms, and provide a thorough list of completed transactions that defines both sellers and buyers. This record should be made available for your unrestricted investigation, and the deals should be supported by references that can be directly contacted in order to substantiate the advisor’s claims relating to prior transactions.

Talk to the advisor’s former clients and decide if their record warrants hiring them to handle the largest transaction of your career.
As a general rule, an advisor should consummate two deals per professional person per year to be defined as “reasonably good.” An “outstanding” firm should have a long-time record of consummating three to four deals per person per year.

The advisor should guide you from the beginning to the end of a transaction. He must be able to help you plan and time the sale, and he must control all aspects of the deal. The advisor’s job should not end when a letter of intent (LOI) is executed—lead negotiation responsibilities are his responsibility from the LOI until the execution of the definitive purchase agreement (DPA). This requires highly specialized knowledge in the area of reps, warranties and indemnifications—critical issues in which financial consequences can be as significant as the purchase price.

The normal terms that acquirers usually obtain in these areas are generally accepted by most legal counsel as adequate. However, these normalized terms often leave a seller in a precarious post-closing situation, which could cause them to potentially lose a significant portion of the sale proceeds. Consequently, your advisor must have an intimate familiarity with these issues and have the capability, again, to control the deal process from the LOI to the execution of the DPA. This will assure you the maximum protection in the reps, warranties and indemnifications.

In order to obtain a premium price, an advisor must be tough, aggressive and determined. This is necessary to convince a strong-willed, sophisticated acquirer that things must be accomplished in a way acceptable to the seller. The advisor must understand the leverage points that will pressure an acquirer to provide your desired price and deal terms.

A desirable advisor is one who takes a business-oriented as opposed to a financially oriented approach to the valuation and sale of your company. Most advisors believe the sale process is only a financial exercise; nothing could be further from the truth. Ask yourself the question, “Do all publicly traded companies in a specific industry trade at the same multiple of earnings?”
The answer is no—because of the differences in the companies’ business foundations and what this portends for
future growth and/or threats to earnings.

The only way a seller’s business foundation can be evaluated and a determination be made about the company’s future growth opportunities and/or risks is an advisor’s thorough pre-sale investigation of the business foundation. This includes a detailed investigation of the company’s operations and production capabilities, marketing, personnel, facilities, purchasing and operational cost efficiencies, and demographic considerations related to the industry in which the company operates. By the time the process is concluded, the advisor must thoroughly understand the business niche and how it correlates to future growth and profitability. This will enable an accurate forecast of future profitability and EBITDA.

Many advisors either do not possess the capabilities or are unwilling to spend the time to perform this business investigation. Utilizing only a financially oriented approach will likely have a serious negative impact on your transaction price.
An advisor should also have a history of doing all-cash deals. This type of deal is conducive to minimizing a seller’s post-closing exposure. With the exception of certain highly unusual situations, there is no good reason for a seller not to do an all-cash deal. Advisors that recommend their clients accept other than all-cash deals are being overly accommodative to an acquirer’s needs at the expense of their client.

Other Intangibles
Do not underestimate the value of an advisor who clearly articulates advice and ideas in a manner that provides strong guidance. The advisor must have the strength of will, the breadth of knowledge of the acquisition process and the ability to convey that to an owner or CEO to gain buy-in to his leadership in this process. Although the ceding of a minimal amount of control is often difficult for an owner or CEO, it is necessary if the seller is to maximize their transaction price. The proven advisor must guide and direct the process, though the seller should always retain the unqualified right to make all decisions regarding the acceptance or rejection of a specific deal’s pricing and terms.

Any seller foolhardy enough to want an advisor they can totally control is making a critical mistake. Realize that an advisor who can be dominated by his client will also be likely dominated by the acquirer. What the seller really needs is the rare advisor with the proven record of being able to control large, sophisticated acquirers and obtain premium prices for their clients.

If a company has multiple shareholders who have significantly different financial and personal objectives, for example, it becomes even more imperative to find a strong-willed advisor. The advisor must have the expertise to develop a solution to reasonably satisfy all shareholders and the ability to articulate why the compromises inherent in his solution will fairly benefit all shareholders. This mandates not only a strong and forceful advisor, but also one that has compassion and understanding. This will facilitate his appreciation of the significance of the personal reasons, objectives and conflicts that make certain divisive issues important
to particular shareholders. In this way, a compromise can be developed that will make all shareholders agreeable to the solution.

If it is necessary to transact a premium-priced deal, an advisor must be patient. You don’t want an advisor committed to a quick sale, regardless of price, as the objective is to consummate a deal only after a premium price has been obtained. Until that is realized, no sale should occur.

Although the normal time to transact a deal is usually six to 12 months from when an advisor begins evaluating the company, it may take two to five years to consummate a premium-priced deal in some situations. In these cases, probably about 5–10% of total deals, a much longer time is required if the seller’s legitimate objectives are to be fully satisfied. Therefore, experience with these time issues should also be discussed with a potential advisor. If they have not taken an extremely long time to successfully complete a few sales, it may be indicative of an interest in “churning deals” at less than premium prices, rather than in getting maximum value for their clients.

In Conclusion
There is no one approach to a sale that is appropriate for all sellers. For an advisor to be consistently successful, he must be creative. An advisor who takes the time to understand you, your company and your needs will be able to determine your recipe for success. This advisor should be able to sustain the positions that will satisfy your personal objectives and provide you a premium-priced deal.

Selling a company may be the largest transaction an owner or CEO ever deals with, and the right advisor should add at least 10–20% to a transaction price. Apply those percentages to the expected transaction price, and then decide what characteristics are the most important to you. You should come to the conclusion that the most important characteristics in an advisor are: knowledge, experience, character, integrity and toughness. When you find these five characteristics, you will have found your advisor.

George Spilka is president of George Spilka and Associates, a national acquisition consulting firm specializing in middle market, closely held corporations. E-mail:; 1-412-486-8189; Fax: 1-412-486-3697

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