“He who represents himself has a fool for a client.” While Abraham Lincoln was talking about lawyers, a recent empirical study shows the same could be said for business owners who forego the services of an investment banker when selling their business.
A research paper on “The Value of Middle Market Investment Bankers” published by Fairfield University professor Michael McDonald in September 2016 surveyed 85 business owners who used an investment banker to sell their businesses for between $10 million and $250 million during the period from 2011 to 2016. The study found that investment bankers added value in the sale transaction, as 84% of respondents citing the final sale price as being equal or higher than the initial sale price estimate.
The owners surveyed identified 8 ways in which investment bankers add value for middle market business owners when selling their business:
- Managing the M&A process and strategy
- Structuring the transaction
- Educating and coaching the owner
- Negotiating the transaction
- Enabling management to focus on running the company
- Adding credibility to the seller
- Preparing the company for sale
- Identifying and finding the buyer
The study observed that the M&A market for private companies is highly inefficient, and that the 8 investment banking benefits identified by the survey respondents all serve to capitalize on the advantages of, and minimize the disadvantages of, this market inefficiency. The study reports that the market is inefficient for three reasons:
- First, the market is opaque. There is no version of a stock market for middle market companies, and thus there is very little public information about middle market companies. There is no list available to private business owners of comparable company M&A transactions with valuation data within the middle market, and public companies who acquire smaller companies usually don’t disclose purchase prices as these acquisitions are usually not considered material to the buyer’s financials.
- Second, the middle market suffers from a severe imbalance of information and experience between buyers and sellers. Sellers have an information advantage about their own companies, but buyers are frequently vastly more experienced in transactions in the market. In addition, many sellers often have poor financial and operating reporting, making communication with potential buyers more difficult. Business due diligence is far more intense and detailed than a first time seller has ever experienced.
- Third, the sale process is often difficult and time consuming. In many cases, it takes up to a year or more to sell a middle market company. Sellers must deal with a litany of issues from unqualified potential buyers, which may knowingly or unknowingly breach the trust and confidentiality of the company for sale. Business owners invariably become distracted during an intensive sale process which often negatively impacts company performance at just the wrong time leading to lower values.
At Mirus, data from a sampling of our recent engagements illustrate the inefficiency of the M&A market for private companies, with offers often ranging from 25% below to 25% above the average offer. The winning bid in these recent Mirus-advised transactions exceeded the average bid by a range of 11% to 69% and the winning bid, on average, was 34% higher than the average bid received for that deal. While the range of transaction values here is broad – our typical transactions are in the $10 million to $100 million range – the total value created in these processes was nearly $100 million.
Investment bankers level the playing field between buyers and sellers in the opaque and inefficient M&A market for privately-held companies, in the same way that attorneys do in legal matters. Don’t be a fool when selling your business!