The Top 8 Traits

Published: October 01, 2006, By By George M. Spilka George Spilka and Assoc.

If you are considering selling your company, one critical decision before proceeding is retaining an investment banking/advisory firm. This decision will determine whether you achieve a premium-priced deal with minimal risk to post-closing liabilities.

If you are the owner or CEO of a middle market company — defined as a company with a transaction price between $2 million and $250 million — these are the key factors to investigate:

1. Your advisor should have an open, verifiable track record. The firm should be willing to discuss nonproprietary information related to prior deals except for the transaction price and deal terms.

   The advisor should provide a list of completed transactions, which defines both sellers and buyers. This record should be available for unrestricted investigation. These deals should be supported by references you can contact to substantiate the advisor's claims. Talk to former clients and decide if the firm's record warrants hiring it to handle your transaction.

   An advisor should consummate two deals per professional person per year to be defined as “good.” An “outstanding” firm should consummate three to four deals per person per year.

2. You want an advisor that guides you from the beginning to the end of a transaction. The firm must be able to help you plan and time the sale. It must control all aspects of the deal.

   The job should not end when a Letter of Intent (LOI) is executed. The advisor should be your lead negotiator from the LOI until the execution of the Definitive Purchase Agreement (DPA). This requires the advisor possess highly specialized knowledge in the area of representations, warranties, and indemnifications.

   These are critical issues, whose financial consequences can be as significant as the purchase price. The normal terms acquirers obtain in these areas generally are accepted by most legal counsel as adequate. However these normalized terms leave a seller in a precarious post-closing situation that could cause the seller to lose a significant portion of the sale proceeds.

   Consequently, your advisor must have an intimate familiarity with these issues and have the capability to control the deal process from the LOI to the execution of the DPA. This will assure you the maximum protection in the representations, warranties, and indemnifications.

3. Your advisor must be tough, aggressive, and determined. This is necessary to convince a strong-willed acquirer that things are going to be done in a way acceptable to you.

   The advisor must understand the leverage points that will pressure an acquirer to provide your desired price and deal terms. This type of advisor probably will be an entrepreneur just like you. Correspondingly, the advisor will understand your makeup and the things important to you and negotiate a deal that will fully satisfy your needs.

   In addition, the advisor should be capable of helping you deal with the myriad of post-closing emotions a seller often has in the months following a deal's completion.

4. You want an advisor that takes a business-oriented approach as opposed to a financially oriented approach to the valuation and the sale.

   Most advisors believe the sale process is only a financial exercise. Nothing could be further from the truth. Ask yourself: “Do all publicly traded companies in a specific industry trade at the same multiple of earnings?” The answer is no. The reason is the differences in the companies' business foundations and what this portends for future growth and/or threats to earnings.

   The only way a seller's business foundation can be evaluated and a determination made about growth opportunities and/or risks is by your advisor's thorough pre-sale investigation of your business foundation. This includes a detailed investigation of the capabilities of your operations and production, marketing, personnel, facilities, purchasing and operational cost efficiencies, and demographic considerations.

   When the process is ended, the advisor must understand your business niche and how it correlates to growth and profitability. This will enable an accurate forecast of profitability and EBITDA (earnings before interest, taxes, depreciation, and amortization).

   Many advisors do not possess the capabilities or are unwilling to spend the time to perform this business investigation. Utilizing only a financially oriented approach will have a negative impact on your transaction price.

5. Your advisor should have a history of doing all-cash deals. This type of deal is conducive to minimizing your post-closing exposure. Except in unusual situations, there is no reason for a seller not to do an all-cash deal. Advisors that recommend clients accept other than all-cash deals are being overly accommodative to an acquirer.

6. You need an advisor that articulates advice and ideas in a manner that provides strong guidance to a client. The advisor must have the strength of will, the breadth of knowledge of the acquisition process, and the ability to convey that to a successful entrepreneur in a way conducive to making the seller want to follow the advice.

   Although the ceding of a small amount of control often is difficult for an entrepreneur, it is necessary if the seller is to maximize the transaction price.

   A seller should allow a qualified advisor to direct the process as the seller does not have the experience to make independent judgments on how to handle the sale process professionally. Although the advisor should direct the process, the seller should retain the unqualified right to make all decisions regarding the acceptance or rejection of deal pricing and terms. Only the seller should make those decisions.

   Sellers foolhardy enough to want an advisor they can control are making a mistake. They should realize any advisor that can be dominated by the client will be dominated by the acquirer also. What the seller needs is an advisor with the proven record of being able to control large, sophisticated acquirers and obtain premium prices for clients.

7. Your advisor must be patient. You don't want an advisor committed to a quick sale, regardless of price, as the objective is to consummate a deal only after a premium price has been obtained. Although the normal time to transact a deal is usually 6-12 months from when an advisor starts evaluating the company, in unusual situations it might take 2-5 years. In these cases, about 5%-10% of total deals, a longer time is required if the seller's legitimate objectives are to be satisfied fully.

   Discuss their overall record with potential advisors. If they have not taken a long time to complete a few sales, it is indicative they are more interested in “churning deals” than in getting maximum value for clients.

8. If a company has multiple shareholders with different financial and personal objectives and/or personal problems with each other, it is even more imperative to find a strong-willed advisor. The advisor must have the expertise to develop a solution to satisfy all shareholders and the ability to articulate why the compromises will benefit all shareholders fairly. This mandates not only a strong advisor but one that has compassion.

This will facilitate the advisor's appreciation of the significance of the personal reasons, objectives, and conflicts that make certain divisive issues important to particular shareholders. In this way, a compromise can be developed that is agreeable to all shareholders.

There is no one approach to a sale that is appropriate for all sellers. For an advisory firm to be successful, it must be creative. An advisor that takes the time to understand your company, yourself, and your needs should be able to sustain the positions that will satisfy your personal objectives and provide you with a premium-priced deal.

When selecting an advisor, don't look for someone with the most pleasing personality, nor should the length of time you have known someone be a consideration. This may be the largest transaction in your life, and the right advisor should add 10%-20% to your transaction price. Apply those percentages to your expected transaction price, and then decide what characteristics are the most important.

George M. Spilka is president of George Spilka & Assoc., Allison Park, GA, an acquisition consulting firm based near Pittsburgh that specializes in middle-market, closely held corporations. He has advised clients on the sale of their firms for 25+ years. His client base includes converters, manufacturers, and distributors. Contact Spilka at 412/486-8189; This email address is being protected from spambots. You need JavaScript enabled to view it.; www.georgespilka.com.