Is It Smart to Attempt an M&A Transaction on Your Own?

Many business owners will consider the use of an investment bank to help sell their company. When determining whether or not to hire an investment bank, it’s essential also to consider the pros and cons of a “do-it-yourself” (DIY) approach.

Top Reasons to “DIY”

  • Avoid advisor fees
  • Work directly with the buyers
  • Have a complete hands-on approach
  • Transaction speed

Top Reasons to Use an Investment Bank

  • Attract more quality buyers
  • Create competition among buyers
  • Provide professional objectivity to the process
  • Conserve the seller’s time and energy
  • Help increase valuation

The Benefits of DIY

DIY TransactionOne obvious benefit of DIY selling is for business owners to avoid advisor fees. This approach minimizes the amount of hard dollars spent. For most private transactions, advisor fees are in the six or even seven-figure range.

A DIY approach also allows the opportunity for a potential buyer to work directly (and solely) with the seller. Without an intermediary, the seller is able to communicate his/her story directly with the buyer.

Additionally, a DIY approach enables the seller to have a complete hands-on approach during every step of the selling process, which some business owners prefer. Owners are able to have full involvement and take total control of their side of the sale.

Finally, many owners are required to pursue a DIY approach because it can offer the best transaction speed. Simply put, sellers sometimes need to get out of their businesses as soon as possible. Whether it’s a personal issue or health problem, legal trouble or a financial roadblock that can’t be overcome, some business owners are placed in situations where they don’t have the luxury of engaging in an investment banking process aimed at carefully preparing a business for sale and seeking out multiple buyers. In a “speed-first” scenario, a seller needs to find a surefire buyer as quick as he/she can, oftentimes sacrificing potentially favorable deal terms or desired transaction value.

If successful in closing a transaction, a DIY seller will be able to take full credit for the sale and will have saved a substantial amount of hard dollars. Or, if a DIY seller is required to get a transaction done “no matter what,” this type of transaction also can offer a high level of speed.

The Benefits of Using an Investment Bank

Although there can be benefits to DIY selling, investment banks are experienced experts at attracting quality buyers and have been proven to significantly increase valuations.

When deciding whether or not to use an investment bank, the process of selling a company can be compared to the process of selling a home.  It is certainly acceptable to list the home as “For Sale by Owner;” however, listing with a realtor typically results in a more favorable outcome for the seller. This is because high-quality real estate agents, like high-quality investment bankers, have access to valuable resources and have perfected techniques to attract the best buyers.

In a 2016 studyi titled “Does Hiring M&A Advisors Matter for Private Sellers?”, Agrawal et al. analyzed a sample of 4,468 M&A transactions over a 33-year timeframe to examine the average outcome of hiring a sell-side M&A advisor such as an investment bank. The study concluded that “private sellers receive significantly higher acquisition premiums when they retain M&A advisors.” The study outlined exactly how M&A advisors are able to improve valuations.

One of the key factors outlined in the study was the importance of competition. M&A advisors are able to keep multiple, relevant bidders engaged simultaneously. By identifying strategic buyers, M&A advisors can evaluate the reasonableness of a buyer’s potential offer and manage the entire auction process. The concurrent interest from several parties is critical to obtaining the best sale price. The study states, “A key determinant of the seller’s bargaining power is the number of competing bids it receives. A seller has more negotiating leverage when a prospective buyer believes that it is competing with other bidders.”ii

The study also concluded that M&A advisors are even more advantageous in private transactions. It is important to utilize M&A advisors in private transactions, the study states, because private sellers often do not have the advantages of public sellers, such as greater visibility and media exposure, which can help attract the attention of potential bidders. By contrast, private sellers must try to create this “public-seller” type of competition.

But investment banks do more than create competition. They also:

  • Assess businesses from a buyer’s perspective, which allows for objectivity throughout the selling process. This objectivity is vital for the success of the transaction.
  • Determine a comprehensive valuation that considers the market, timing and specific industry.
  • Locate “off-the-radar” buyers, introduce industry cross-overs and reach new geographies.
  • Provide expertise that can allow sellers to structure an advantageous deal with beneficial terms.
  • Utilize a variety of processes for managing data rooms, guiding due diligence and handling buyer requests.

Ultimately, private sellers are able to conserve valuable time and energy while their investment bank focuses on the sale of the company. This allows owners to focus on the company and help prevent the transaction from becoming a distraction that negatively impacts business performance.

While owners concentrate on fulfilling the needs of the business (thus preserving transaction value), their investment banking team is able to focus on creating competition and locating the best potential buyer for the highest acquisition premium. On a $15 million transaction, a 10% increase in transaction value would result in a $1.5 million increase in total consideration, which will cover even the high range of advisor fees. And most importantly, the owner will have saved hundreds of hours of time and significant soft dollars.

Which Approach Is Best?

Both approaches to M&A transactions can offer business owners with a variety of benefits. A DIY seller is able to take charge of the entire sale process, avoid advisor fees and provide potential buyers with a direct view of the business. He/she also can move as quickly as possible. However, the sale process could disrupt current business operations and cost the owner valuable time and energy.

The use of an investment bank also can offer significant value to owners by offering expertise, creating competition and formulating the best route for negotiating a sale and by allowing business owners time to concentrate on business performance.

A recent Axial article cited another studyiii that surveyed 85 business owners who sold their businesses with the help of investment bankers from 2011 to 2016. One of the key questions asked was how much value the investment banker added to the process. The responses represented a ringing endorsement for the case to use an investment banker, with 100% of respondents indicating that the banker added at least “moderate” value and over two thirds of respondents indicating that the banker added “significant” value.

How much value did your investment banker add?

Source: Axial

The process of an M&A transaction is demanding and requires strategy. If private sellers are willing to take on the full responsibility and demand, and “go it alone,” the result can be greatly rewarding. However, if private sellers seek the advisory of an experienced investment bank, they will likely receive significantly higher acquisition premiums from more interested parties.

i Source: Agrawal, Anup and Cooper, Tommy and Lian, Qin and Wang, Qiming, Does Hiring M&A Advisors Matter for Private Sellers?, May 2016, Page 8-10.

ii Source: Fink, M&A Advisors Proven to Improve Valuations, January 2015, Page 1.

iii Source: Carter Morse Mathias and Company, Business Owner Survey: The Value of an Investment Banker, http://www.cartermorse.com/whitepaper-request