Earning the Big Bucks
We estimate that last year the owners of American mid-market businesses spent about $10 billion to close about 9,300 M&A deals. We therefore figure they paid fees to M&A advisors of about $1.1 million per deal.*
So both $1,1 million and $10 billion seem like a lot of money. Ever wonder if the M&A advisors who initiated those deals are worth it?
And the Answer Is…
Sure, we get good feedback. People tell us that we work diligently and efficiently, manage fundraising and M&A processes effectively, head off problems that trip up the less experienced, etc.
And of course, there’s a flip answer to the question of whether advisors are worth it: they wouldn’t be in business if they weren’t.
But being data-oriented guys, we’ve always been a bit uncomfortable about the paucity of hard evidence that our M&A services create value. That changed when we ran into a large-scale, heavily researched and referenced academic paper titled Does Hiring M&A Advisors Matter for Private Sellers.
In short, the answer is clearly yes, hiring an M&A advisor does matter in a strikingly positive way. “We find that private sellers that hire professional transaction advisors receive significantly higher valuation premiums.” To quantify that, 25% higher.
Let Me Count the Ways
The study lists several ways advisors create value for sellers. Some are:
Overcoming a negotiating disadvantage with bidders who tend to be larger and have more M&A experience.
Providing buyers with key data about the seller. The absence of data creates uncertainty that lowers seller value.
Attracting more buyers to the table accessed via their pricey subscriptions to proprietary databases and business relationships. More buyers increase bidding competition. Obscure sellers attract little.
Presenting a compelling argument for the seller’s value and negotiating a greater share of the synergies created by the combination.
Maintaining a brisk pace through the M&A process. Delay kills deals.
For a more detailed review of what M&A advisors do in sellside engagements, see my article How Do M&A Advisors Sell a Company?
Some Caveats
Of course, not all sellside advisors close the deals they were hired to manage, usually for one of three reasons: Their client’s business is troubled; their client is uncooperative or holds an unrealistic perception of value; the advisor is inexperienced and/or not very effective. All these obstacles are more common among smaller businesses, the very ones that most often find it difficult to attract competent advisors.
And of course, the successful seller must also deduct from sale proceeds the cost of hiring an advisor. Yet one would have to earn a $2.5 million fee to nullify the 25% gain in value when a company sells for $12.5 million rather than $10 million.