Yesterday I visited with a company, and was surprised at
what I found. I knew they were already
represented by a 150 person national M&A firm and that they paid more than
$50,000 in upfront “consulting fees”. But from the evidence it looks like the
M&A firm didn’t come close to putting a full effort into selling this
I understand the need for upfront fees for some firms. There is an enormous amount of work in
“packaging” a company to be sold and there is also some benefit in having a
client have “some skin in the game”. At
my company we typically do not charge a fee (only a success fee, a topic of an
entirely different post), but I understand that sometimes it is necessary.
If you do, as an intermediary (broker/M&A) take a fee,
you have to be very careful to work for the client, not for the fee. I remember talking to a firm in the San
Francisco bay area, and they had to fire their business development guy because
he became dependent on the up-front fee and basically was working to get that
fee, then moving on the to next prospect.
This large M&A firm
that raised my eyebrows:
- They did not discuss a valuation with the client
- They did not list the company on any of the Internet merger
or for-sale sites
- They did a five year sales/earnings forecast without the
We ALWAYS discuss valuation with a client. We do it for many reasons, one selfish reason being that we don’t
want to do months of work only to find out we are not even on the same
page. I don’t care so much when I first
meet a client, because I don’t know yet without doing the analysis what the
valuation may be. We typically go off
and do a valuation analysis, then come back and discuss the results with a client,
usually at length. Then after discussing the valuation, and only then,
do we sign a representation agreement.
By not discussing valuation, it leads me to believe the M&A
company was far more interested in the consulting fee than they were in getting
the business sold.
Business-for-sale Web Sites
It used to be that only really small companies were sold on
the Internet, but now we see $50 million dollar businesses advertised. I looked and looked and could not find this
business on any of the top web sites. The
only place I found it was a one-line summary on the M&A company’s web site.
I know the M&A firm did some mailings, but if they were serious about selling this company they would
have used the web as well. The client company is not that big.
Sales & Earnings Forecast
I read the prospectus and was surprised by the growth that
was forecasted for this rather mature company.
The owner said, “oh, I didn’t do that, the M&A company did that
forecast”. I was shocked. I wouldn’t do that entirely for an owner for the
simple fact that I don’t want to be held liable for those numbers, much less
the fact that they simply can not be very accurate if the business owner wasn’t
involved in the process.
I need to write an entire blog post on choosing an
intermediary. But in short, probably the
best way to check up on a company is to ask for references on the past few
deals that they have done. Often the
larger firms are only as good as the individuals you are dealing with, so ask
for deals THEY have done. Look for certifications from the IBBA by looking them
up at www.ibba.org. The CBI certification and the M&AMI
really do mean something, as it takes a financial and time commitment (and
therefore a commitment to the profession) to pursue the education required to
get these certifications.