Use of Advisors in Acquisitions

Posted on March 11, 2007

Nobody can wear all the hats in an acquisition. Most CEOs need and want advisors to help them in their M&A efforts. How well you can work with those advisors may determine the outcome.

No matter how smart you are, your biggest enemy is what you don’t know. Unless you’ve spent a lot of time doing M&A work, I guarantee you there is a lot you don’t know about this process.

I’m not just talking about legal jargon. I’m talking about how the parties “sniff” each other out, how the negotiations take place, what you should expect to give and get. It doesn’t stop there. There are many subtleties. The worst thing you can do is take a hard position on an issue that is completely outside the normal way deals get done. It shows you to be an amateur, and it could either unravel the deal or cost you money.

This is why great advisors are invaluable. They guide you through times when you have no experience yourself. How you work with your advisor depends on a number of factors. In general, I believe that the buyer or seller should themselves do as much as possible in the areas they can do well. A buyer or seller could be one person in a small or mid-size firm, or a team of people employed by a larger firm.

How well do you show?

I’ll assume you’re a great person. But does that come through when meeting with the other party? Do you come across as friendly, very knowledgeable, reasonable, and overall someone they really would want to do a transaction with? If so, you should be center stage. If you show poorly, then you’ll need an advisor who can be more of the interface. But I’ll warn you now, it’s probably not your lawyer.

Do you know when you need help?

If you’re the “front” person, you’ll be out there working the deal. In any given meeting, issues will come up that you didn’t anticipate. You’ll have to make split-second decisions about whether to tackle the issue, or say, “Let me think about that and we’ll take it back up at the next meeting,” which is code for, “I don’t know what to do and I need to ask my advisor what he/she thinks first.” If you’re good at seeing the potential potholes quickly and sidestepping, then you can leave your advisor home most of the time.

How well do you listen and take advice?

The best kind of advice you can get is advice that helps you learn the M&A process and how to make decisions. Rather than having an advisor just tell you that $7 million is a fair price, you’ll want to learn how a “fair price” is generally calculated. So when you’re at the table, on your own, hammering out the price, and a key variable changes (say EBITDA adjustments get changed), you’ll be able to amend your offer on the spot—not have to go back to the advisor for a recalculation. If working this way—doing lots of learning—is good for you, again, you can leave your advisor in the background.

Can you be the analyst?

Big important aspects of M&A have to do with interfacing with the other side. But a lot of analysis work has to be done as well. If you are buying a business in your own industry and you know your business, you should be deeply involved in this aspect. Where many can use help is in the normal measures of value for any business. Applying those measures properly is essential to valuation. But when it comes to forecasting the future of the business, the fundamentals of that forecast are usually deep within the specifics of that very business. Things like future market acceptance of the product or service, industry trends, and competition make a world of difference. Most M&A advisors don’t bring industry-specific knowledge. A good M&A advisor does know how to learn fairly quickly and has good horse sense for when he does or doesn’t understand a business.

Are you a lawyer?

Probably not. To do an M&A deal you do need a lawyer to keep you protected from current and future pitfalls. Understand that every deal can be divided into two sections—business issues and legal issues. Business issues are how much you pay (or receive), how much risk you are willing to accept, whether you should insist on more or less security for what you will be owed, and so on. Legal issues are the wording of the deal documents, making sure your deal cannot be unraveled down the road due to technicalities, complying with the law, and avoiding any “surprise” problems coming down the road via the legal system.

A lawyer’s job is not to help you with business issues. I do realize that some lawyers have done so many deals that they have expertise in these matters too. If that truly is the case and they can act in both roles, that’s fine. But too often, the lawyer who tries to act in both roles really worries too early about avoiding all risk, “fights” for you on the legal details way too early, and drives the parties apart. What is supposed to happen is that the parties come together on interpersonal and business terms, get a rough outline of the deal, then let the lawyers “pick over” the details. Some of those details are really important and do get fought over. But when the parties feel like they’re almost there, the deal more often withstands controversy.

Are you a CPA?

A third type of advisor is an accountant. Once the business points are generally agreed upon, and the lawyer is hammering out the legalese, the CPAs get involved. Their focus is generally assessing the tax effect on their client, then suggesting ways to structure the deal to minimize taxes. This is complicated, and understanding the many taxation rules at both state and federal levels is critical. Deal structures can vary widely and can have a huge impact on the real cost of a deal for both sides.

It’s your deal

Never forget that it’s your deal, not your advisor’s deal. I do strongly advocate having great advisors to help you in your M&A activities. I also strongly advise listening to them carefully and peppering them with questions until you fully understand their position. BUT NEVER ABDICATE CONTROL. You make the final decision, and you decide what steps should be taken to have the outcome you desire. It’s your deal.

Takeaways:

• You must know what you don’t know—to avoid stepping into problems blindly.
• You or your internal team should do as much as your skills and competencies allow, and work hard on learning from the advisors you hire so you can build your skill set.
• Never abdicate control—it’s your deal and you must call the shots after listening to your advisors.