The owners of successful small to mid-sized businesses occasionally are approached by financial or strategic buyers seeking to open discussions about a potential merger or acquisition. While this is an encouraging sign that third parties recognize the value of your company, these discussions seldom proceed past the initial stage, foundering on disagreements over valuation, strategy, timing, or other issues. But even in cases where both parties agree on the basic provisions of a deal, it makes sense for a seller to employ a trusted mergers and acquisitions (M&A) advisor, intermediary, investment bank or business broker to evaluate and help execute the transaction. This ensures you achieve the best price and terms, which often more than offsets the cost of the advisor’s fee.
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What is a Trusted Advisor?
In the context of mergers and acquisitions and the sale of businesses, a trusted advisor is a professional or firm that has a specialized skill set that usually includes relationships with potential buyers and expertise in negotiations, deal structuring, valuation, and financing. It also has your interests as a business owner, as its sole priority. While there are many M&A advisors and business brokers in the financial services industry, finding one that qualifies as trustworthy and capable takes some thought.
The author and consultant Charles H. Green developed an equation for determining an advisor’s trustworthiness on the basis of the advisor’s score on four components. (See Figure 1.)
Figure 1: Charles H. Green’s Trust Equation
| Trustworthiness | = | Credibility | + | Reliability | + | Intimacy |
| Self-Orientation |
Source: trustedadvisor.com
Three of these – credibility, reliability, and intimacy – increase trust, while the fourth, self-orientation, decreases it.
- Credibility: The advisor’s provable knowledge and experience. According to Green’s research, this is a necessary but not sufficient factor in trustworthiness. More competence is always welcome, but above a certain threshold, it does not improve trustworthiness.
- Reliability: The advisor’s proven track record of doing what it promised to do. This is the factor on which most advisors rank most highly. It is seen as a necessary but not sufficient factor in trustworthiness. If an advisor is unreliable, the relationship quickly comes to an end, but reliability alone is not enough to engender trust.
- Intimacy: The advisor’s ability to make the client feel comfortable sharing confidential information. Green’s research indicates that this is the most important, and the most often overlooked, factor in a client’s estimation of an advisor’s trustworthiness.
- Self-orientation: The degree to which the firm puts its own interests ahead of the client’s. Advisors want to rank low on this factor. Green’s research suggests that firms that emphasize long-term, collaborative results are most successful at reducing their self-orientation.
What Value Do Trusted Advisors Provide?
Unless a business owner has sold businesses successfully in the past, trusted M&A advisors, intermediaries, investment banks and business brokers can provide value in a number of ways by leveraging their experience and contacts. Here are some of the top value propositions that trusted advisors and business brokers provide.
Bird’s Eye View of Industry Trends
Trusted advisors and business brokers have extensive experience and contacts in the industries in which they specialize. This gives them the ability to identify industry trends that individual business owners might not see. Some of these trends might be particularly advantageous to the business owner. For example, a trusted advisor might recommend that the owner not sell, but rather modify the business to exploit an emerging trend, such as an emerging source of demand or a shift in the cost of inputs.
Valuation Insights
Experience and industry contacts also provide the trusted advisor with an advantage in determining the appropriate value of the company being sold. Access to valuations of comparable companies that have undergone recent acquisitions, to financial buyers’ evolving appetites and IRR targets, and to the synergy value of a company to a strategic buyer are all factors that help a trusted advisor or business broker ensure the business owner gets the best deal possible.
Broad Network of Potential Buyers
A trusted advisor or business broker can shop a company around to a large group of potentially interested buyers. This can result in a much better result for a business owner than simply going with the first unsolicited bid that lands on their desk.
Logistics, Accounting, Legal, and Financial Expertise
The trusted advisor usually has a tried-and-true network of service providers – accountants, lawyers, analysts, financiers, and so on – that can be brought in to work on a sale. This obviates the need for the seller to find her own service providers, which can be a time-consuming, hit-or-miss process. Also, the trusted advisor acts as a hub, coordinating these service providers to ensure they work together in the most efficient way possible. This cuts down on time and costs.
The cost savings from using a trusted advisor to identify and manage service providers, combined with a much greater probability of obtaining an advantageous valuation, can more than offset the cost of hiring a trusted advisor or business broker. Combine that with the advantage of having the logistics, negotiations, and other aspects of the sale handled by someone who has successfully managed many such transactions in the past, and the case for hiring a trusted advisor, even when you are receiving unsolicited bids, is compelling.
As a concrete example of DGP’s ability to add value to any sale of a business, DGP’s clients have seen on average a 50% higher valuation and payout, compared to any unsolicited offer the businesses received prior to engaging DGP. While past performance is never a guarantee of future results, the argument for strongly considering a trusted advisor is compelling indeed.