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.