Critical M&A Questions All Owners Need to Ask: Part 3

Part 3: Questions to Ask All M&A Advisors You Interview

Parts One and Two in our series covering ‘Critical Questions All Owners Need to Ask,’ first broke down what owners should ask and answer themselves—What Matters Most to Me?—and then identified key issues all sellers grapple with—Seller’s Valid Concerns & Common Misconceptions in an M&A Transaction.

In Part Three, we start to lay out the questions that business owners should ask their key advisors as they learn the important tactics which will provide them an advantage in preparation and level the playing field with experienced buyers.

Investment bankers (M&A advisors) play a critical role in both achieving the best price and terms in your transaction and maximizing the likelihood and speed with which it can be completed. It is very important to identify the investment banker you feel most comfortable with, but it can be very difficult to cut through the jargon and sales pitch to truly identify the person or team who will be the best fit for what you are trying to accomplish.

Unfortunately, to complicate this process, there are many investment bankers or business brokers who employ a range of tactics in an effort just to get hired by you. They know most sellers have not been through this process before, so those sellers wouldn’t necessarily have any frame of reference to ask questions or challenge assumptions made during their presentation or “pitch” to you. This provides an opportunity to say the things the advisor thinks will get them hired, banking to some degree on the likelihood some key questions will be glossed over or not asked at all. So you must try to recognize these attempts and not allow certain points or statements made in a presentation go unchallenged or unquestioned. It is rarely the advisor who peppers you with unwanted emails or calls who you want to speak with, and rarely the one who throws out an eye-popping unicorn valuation estimate who might be most likely to achieve that outcome if it is out there. So you have to press everyone you talk to about the underlying assumptions in what they are telling you so you can judge their qualifications and assumptions against others you interview.

Fortunately, the valuation and M&A process is not as mysterious and convoluted as it may seem. Almost every step in the process is actually quite logical and a good investment banker should be able to explain anything in their presentation in a way that seems rational and makes sense to you. More often than not, if what someone is telling you seems too good to be true, unrealistic, or something you yourself wouldn’t likely do if you were the buyer – it probably isn’t the most likely outcome.

The best tool that owners have for determining the right fit and telling the difference between options, is asking questions and evaluating the answers. The most common problem is that most business owners don’t know the right questions to ask to determine which bankers would be helpful and honest, and which are just using selling tactics. In a sense, the questions you ask should put bankers on their heels a bit by drilling-into specificity and process knowledge they may not expect or be prepared to answer.

These questions below should be able to weed out the bankers with tactics and an agenda fairly quickly. Always remember, an investment banker dangling a very high potential valuation may just be a tactic to get you to hire them. You need to determine whether their assumptions are valid and/or likely to occur relative to what others tell you. If there is a buyer willing to pay an eye-popping price, then the best advisor running a well-run competitive process will find it.Speak to a few people and select the one who you think will listen to your concerns, represent you the best and craft the process most likely to accomplish your goals.

Questions to Ask when Selecting an Investment Banker:

  • How many companies like mine or owners with similar circumstances have you represented and why do you think that is or isn’t relevant to how you would handle my transaction? Sector experience may not be as important as representing owners with similar circumstances.
  • What size transactions, industries, and types of buyers do you specialize in, and why is that important? You need to identify a banker who reaches an audience most likely to generate interest in your company.
  • Who from your firm would be on my team, and what will the individual responsibilities of these team members be day-to-day? Make sure the senior team members will be actively involved from start-to-finish.
  • How is your process different than other investment banks? Not all firms contact buyers in the same way, go to the same audience, etc.
  • Why would your process be likely to achieve the best outcome for my company? Evaluate whether they understand what you have told them will be your priorities.
  • How does your firm handle confidentiality issues throughout the process? A key point for owners to understand and be comfortable with the approach.
  • I have many concerns about who may find out about what I am doing, who needs to be involved internally, and how/when different people internally and externally will find out or be notified about the process. What realistically needs to happen, and how do you suggest I handle these issues? Understand how others with your same concerns worked through these issues.
  • How do you select potential buyers? Who on your team contacts them and how? Identifying the most likely buyers and communicating the rationale effectively at a senior level can be far more important than blasting information out to hundreds of people.
  • How do you think different types of potential buyers will value my company? The wrong question is “what’s my multiple?” The right question is “which buyers can assume a higher level of cash flow going forward after acquiring my company?”
  • How will you market my company? Do you set a price? The answers to these questions will show you whether the advisor typically works with businesses the same size as yours: smaller transactions typically set an asking price, larger transactions do not (i.e., they run an auction).
  • How will factors like third-party financing requirements, cost savings or strategic synergies play into valuations proposed by different types of buyers? Valuation is directly correlated to assumed future cash flows, risks to those cash flows, and the ability to finance the purchase price with less expensive capital options like bank debt. Depending on what circumstances apply to each buyer, their valuation approaches can vary significantly.
  • What valuation methodologies do you use and why are the data points you’re using relevant to a company the size of mine? Don’t be fooled by examples of valuations from much larger transactions or public companies – smaller businesses are riskier and valued very differently in most cases.
  • How will current market conditions influence the sale process? The number of buyers able to consider or finance a transaction and participate in your process based on economic or M&A market conditions can be very important – more qualified buyers equals more bids, and more bids increases the likelihood of positive outlier proposals.
  • Based on what you know about my company and my objectives, what issues do you see that could prevent me from reaching those goals or present obstacles? Every deal runs into known and unknown challenges in the diligence process, try to determine how those might be handled.
  • Given the above, is now the right time for me to pursue a transaction or should I wait and/or do anything before launching this process? You only get one chance to enter the market at the right time and maintain leverage over the process, be very careful NOT to start the process if the time isn’t right or financial performance isn’t predictable over the coming months.
  • How do your fees work? Generally, transactions between $20 – $250 million would have two components: a relatively small portion up-front and the majority in a success fee paid at closing based on a percentage of the transaction amount (typically the larger the transaction, the lower the percentage). Be careful about “price shopping” (i.e., picking the one with the lowest fee), the adage “you get what you pay for” can be very true in such an important transaction and a good advisor should pay for themselves many times over.
  • What other types of advisors should I be speaking to and when should I contact them? How and when should all of my advisors be communicating and collaborating? The input of an experienced M&A attorney, an accounting firm with experience with Quality of Earnings (“QoE”) work, and wealth advisor who has access to investment opportunities and tax specialists familiar with transactions of your size are all critical. And their impact can be magnified significantly if you have them all collaborating and working together. All of these people should be involved before the transaction, and the sooner the better.
  • What is the most important reason why your firm is the right fit for this company? The answer to this question allows you to evaluate how tightly their vision for the transaction aligns with your priorities.

Owners should be able to learn a lot about their various options from how investment bankers answer these questions—both in what they all say the same and what they say differently. Importantly, the right advisors should be willing to spend time with you and discuss all these things at no cost to you.

With answers to these questions—and any others that address your specific concerns—you can more easily determine which investment banker will be the right fit to represent your company in what will likely be one of the more important transactions of your life.


Be on the lookout for future parts in this series in coming weeks:

Part 4: Questions you should always ask Law Firms

Part 5: Questions you should always ask CPAs/Accounting Firms

Part 6: Questions you should always ask Wealth Advisors


Previously published parts in this series:

Part 1: What Matters Most to Me?

Part 2: Seller’s Valid Concerns and Common Misconceptions in M&A

To download a PDF of this blog click here.

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