Starting my career on the private equity side, we were taught and told that nothing is better than a “proprietary deal” which means, a deal which an investment banker or M&A advisor is not involved. The key reason is that you have a one-on-one dialogue with a company vs. being one of many when participating in a process run by an advisor. This bears obvious benefit to the acquirer, namely that they’re not in competition with other folks, thus acquirers have an inherent advantage from a negotiation perspective around valuation and deal structure. The irony of that dynamic is that in so many cases, we the investor lost out on deals because the entrepreneur felt the proposed structure was too aggressive, when in reality a preferred stock instrument for a growth investment is standard, and if they had an advisor on their side to inform them of this norm, perhaps such deals would have proceeded.
While this strong preference is seemingly understandable from the acquirers’ perspective, it can be highly detrimental to the entrepreneur, beyond the company getting a worse deal than if they have other interested parties at the table. That reason alone, should propel those who aren’t building their business for their health, to bring on an advisor to properly explore their options, yet in addition, not knowing what you don’t know for first time sellers can present significant risks, and in many cases awful outcomes. I recently spoke with an entrepreneur who mentioned they had been through two failed sale processes over the years, which naturally I cringed, as the amount of time, effort, money, distraction and tease of such an experience is horrible for one outing alone, not to mention two. While a failed sale process is a nature of the M&A beast where deals can die for a variety of reasons, the reason why it failed twice heightened my cringe, as in both cases they signed term sheets with fund-less sponsors, meaning private equity groups who don’t have a committed fund. I always tell folks, it’s hard enough to get the stars to align to close with a larger, well-capitalized acquirer, yet with a fund-less sponsor you are significantly decreasing the odds of a close, as they do not have committed capital, and rather are at the mercy of their wealthy individual backers, who may become unavailable or disinterested at a moment’s notice.
This is one example of terrible results which could have been mitigated by having a savvy advisor managing this process, and guiding the seller appropriately. Ultimately, by having an advisor with expertise in your space, you greatly increase the odds of a successful close, which requires careful, tactical planning, guidance and execution, step by step, in addition to allowing for the market to present the best offer for the business, by being strategically proactive, vs. reactive with those who solicit companies directly, wanting a proprietary dialogue and negotiation, hoping for an attractive, below market price.