M&A Advisor Fees for Selling a Business

Information about M&A advisor fees for selling a business is surprisingly difficult to find.  I’m not sure why other M&A professionals are reluctant to discuss fees and even less sure it makes sense in today’s online world. This is a current summary of the fees I’m seeing in the market.

Since the first version of this post in 2009 there have still only been a few other posts on M&A fees. Some of those are linked below.

I hope you’ll share your experiences on fees, or other good links, by commenting below.

Update 2014

There are no industry surveys or databases on M&A Advisory fees. The only ways I know to get information on fees is to ask people directly, from similar posts to this one and from comments like the ones below.

Because the data is so sparse, changes in fees over time are even more difficult to determine.

As we continue to recover from the mortgage crisis and continue to work in an environment where we have the lowest cost of capital in our lifetimes, I’m seeing two trends in M&A advisory fees over the past few years:

1. An increase in success fees of 1 to 2% (of total transaction size), and

2. “Minimum fees” are becoming more common

It’s Easy to Compare Fees but Much Harder to Compare What You’ll Get

Selecting the best M&A advisor to sell your company is one of the most critically important decisions a CEO or board will make during the company’s entire lifespan. It is also one of the most difficult decisions to make because it’s impossible to do an objective comparison between advisory firms.

For example, the most important criteria to consider when selecting your M&A advisor is the probability that they will actually sell your company. That may seem surprising – but the reality is that the probability of success varies over an almost unbelievable range. There aren’t any hard data or surveys on this, from what I have seen in the industry, the range looks like this:

Probability of Closing

I appreciate how difficult this will be for many people to believe. But I’m convinced that the probability of success varies from around 10% for low quality firms up to 75 or 80% for very high quality firms – and this independent of the company. In other words, if you hire a low quality firm, the chances could be as low as 10% that your company will actually end up being sold.

Also difficult to accept is the effect the firm will have on the price you’ll likely receive, which looks something like this:

M&A Fees and Advisor Quality

Yes, the price you receive could easily vary over a range of plus or minus 50% depending on the quality of the firm you select.

Interestingly, the fees charged (above in light blue) vary over a much smaller range – presumably due to the competitive nature of the M&A advisory industry.

One important thing to keep in mind as you think about fees is the red lines on the graphic above. The red lines are the differences in the amount of cash the shareholders will likely end up with if they select a firm of different qualities.

Please also keep in mind that the amount of money received is a far less important consideration than the first graph above which illustrates the probability that the transaction will actually get completed.

Growth Strategy Consulting, Exit Planning and Mentoring- Included?

Another variable that is very difficult to compare between firms is the amount of Growth Strategy Consulting, Exit Planning, mentoring or coaching that is included in the fee. Some firms are willing to work with the company CEO for many months, and sometimes years, to increase the fundamental value of the business. Other firms believe their job is just to sell the business. These firms don’t include any significant work on helping the management team increase the value before the transaction.

To put this difference in perspective, firms that add a lot to the fundamental value probably invest about two man years of professional time in a typical exit. Firms that are more focus just on the transaction might put in one quarter to one half of that – around one half to one man year of senior time.

When the M&A advisor and the company expect that there will be a considerable amount of professional time applied to increasing the fundamental value of the business, the there’s usually an increase in the fees paid on a monthly basis. Some part of these monthly fees are typically not applied as a prepayment on the success fee.

M&A Advisor Fees and Firm Size

M&A Advisor and Business Broker fees increase with the size of the transaction, but not in direct proportion. Part of the reason is that the amount of work required to sell a larger business can actually be less than that to sell a smaller company. Where this becomes especially evident is at the smaller end of the transaction size range.

M&A firms and Business Brokers can be categorized by size roughly as:

1. At the upper end of the range there are the big investment banks and accounting firms with multiple teams devoted to M&A.

2. In the middle are mid-sized firms that usually include three to seven professionals, usually called M&A Advisors.

3. At the smaller end of the transaction range, most businesses are sold by smaller firms usually called Business Brokers.

Understanding the pricing mechanisms for M&A fees is easier if you look at it from the perspective of the professionals doing the transactions. Very large firms have offices in downtown towers with human receptionists and assistants. The mid-sized firms have smaller offices in less expensive buildings, use automated phone answering and have no assistants. The individuals in boutique firms answer their own phones.

For a transaction to make sense for the big firms with downtown offices, the total fees have to be a few million dollars. For the mid-sized firms, the minimum fee size is in the $500,000 to $1.5 million range. Smaller firms can afford to do exit transactions where the fees are only a few hundred thousand dollars.

Typically, the big firms will compete most aggressively for exit transactions above $100 million because these transactions will produce several million dollars in fees. The $10 to $50 million range is the optimum range for the mid-sized firms. Smaller transactions are usually done by business brokers. These numbers shift up or down depending on how busy the firms are. This post describes the differences between M&A advisors and business brokers in more detail.

Fee Structure

The standard M&A advisor fee model includes a work fee and a success fee. In some cases, it may also include a contingency or break fee.

This fee structure is very consistent between firms of similar quality. At the extreme ends of the range there are firms that will undertake engagements with no work fee and also firms that structure their fees entirely on an hourly basis with no success fee. If you see these different fee structures and the reason for the difference is not obvious to you, I suggest you find an Exit Coach or experienced mentor who can help put them in perspective.

The Lehman Formula, Accelerators and Ideal Fee Alignment

Some M&A firms still base their M&A fees on the Lehman formula. This formula was created by the old Wall Street firm bankrupted by the mortgage crisis. The formula was originally used for financing engagements, but somehow also came to be applied to M&A transactions.

If you think about it for a few minutes, I think it’s pretty obvious that a simple linear percentage creates much better alignment between the M&A advisor and the Shareholders.

The ideal alignment is probably closer to the exact opposite of the Lehman formula. Ideally, the M&A firm would be paid a larger percentage of the last million than the first million. This is often called an “accelerator.” The main reason this is not more popular is the difficulty of accurately predicting the fair value of the company at the time the transaction completes often a year or more later.

For example, think about a situation where the company’s value goes up unexpectedly due to a change in their market, a very large contract or some technical innovation after the M&A engagement is signed. Would it be fair for the M&A advisor to have a much larger fee because of something they had nothing to do with? The converse is also true, perhaps the economy changes, or the business suffers a setback, after signed the engagement. A change in the fee percentage would be equally unfair in that situation. For this reason, almost all M&A fees are straight linear percentages of the final selling price.

M&A Advisor Work Fees, Retainers or Up Front Fees

The selling company commits to a work fee at the beginning of the engagement. Some firms will invoice monthly over the first four to twelve months. This initial fee can also be called a retainer, engagement fee or upfront fee. This covers the M&A advisor’s direct costs during the initial stages, as well as their contribution to the preparation of the selling documents and due diligence materials.

For larger transactions, the work fees are usually $100,000 or more. For boutique firms working on a $20 to 30-million exit transaction, the work fees are usually in the $50,000 to $75,000 range. At the lower end of the transaction spectrum the work fees don’t usually go below $50,000 because no matter how small the transaction, there is still a fixed amount of early work that has to be done.

There are firms that will charge lower work fees, sometimes in the $30k to $40k range. Lower work fees are often an indication that the firm has people who are not completely busy. For that reason, lower work fees are also more common when the M&A market is not very active.

Interestingly, firms that work on transactions valued under $5 million – usually called “business brokers” often do not charge a work fee.

It’s very unusual for an M&A advisor to undertake an exit transaction without a work fee. Part of the reason is that anyone involved with exits has seen a situation where, at the time of the initial engagement, the shareholders and board are enthusiastic about an exit; but by the time an offer gets to the table the shareholders have reconsidered. This can happen precisely because the M&A advisor has done a good job, and has shown the current shareholders that the company is worth more than they thought. This alone can result in shareholders changing their minds and deciding to continue to own the company for a while longer.

The work fee is a fair way for the professionals to protect their initial investment in helping to facilitate a transaction. It is also a test of how serious the sellers are to actually sell the company.

M&A Advisor Success Fees

Success fees for selling a business in the $10 to 30-million range are typically 6 to 8% of the final value. This means that the M&A firm that successfully completes a $25-million exit transaction will usually be paid a fee at closing of about $1.5 to 2.0 million.

For transactions over $100 million, success fees are usually in the 2 to 3% range. This means that a firm executing a $100 million exit will typically receive a success fee in the $2 to 3-million range. For a $500 million exit, the fees are about 1% – in the $5 million range.

Where success fees become more challenging is in the smaller size transactions because the amount of work required to sell a $5-million business is not significantly less than the effort required for a $25-million exit.

Minimum Fees

In 2014, I’m seeing minimum fees being charged much more often. This clause in the engagement contract specifies the smallest amount the M&A firm will be paid if a transaction is completed.

I find the psychology of minimum fees fascinating. In my experience, most advisors don’t ask themselves what they are saying to the customer.

Just think about it. If the discussions between the M&A advisor and their prospective client have been open and realistic, why would the engagement agreement need to include a minimum?

(If you are looking at an M&A engagement agreement and this doesn’t make sense to you yet, I suggest you find an Exit Coach or experienced mentor. You can also post a comment below and I’ll be pleased to help.)

Why Smaller Transactions Are Often More Work Than Larger Ones

Selling a $5-million company can be more difficult than selling a $25-million company. This is because the buyers for smaller companies tend to be either the junior people in the large company acquisition teams, or the CEOs and CFOs of medium-size companies. Similarly, the legal and accounting professionals tend to be less experienced. Combined, these relatively lower experience levels, and reduced availability, means that smaller transactions often require significantly more time and effort from the M&A advisor.

Even the smaller, boutique M&A firms will not usually want to undertake an exit transaction in which the selling price will be less than $ 5 million. Even at a 10% success fee, a $5 million transaction will only deliver a $500,000 success fee. This is approaching the minimum economic size that even the smallest M&A advisory firms can undertake.

This is why transactions below the $5 million threshold are often done by business brokers or individuals who have developed expertise in this area.

Because of the amount of work involved in a $5 million transaction, the success fees are usually in the 10 to 12% range.

While the amount of work required to perform exit transactions is similar whether the company is valued at $5 million or $100 million, the fees for large firmsare higher due to their overhead and perceived prestige.

Other Good Posts on M&A Fees

These are some of the other good posts on M&A fees:

http://www.imergeadvisors.com/ma-advisor-fees/

Please Share Your Data and Links

I’d appreciate hearing from you about your experiences with M&A advisor fees. The only way I have been able to aggregate this information is by asking CEOs, board members, investors and M&A advisors that I meet. If you have a data point you can share, or another good link on M&A fees, please either leave a comment below or email me directly.

M&A Advisors Should be Local to Reduce Failures

When CEOs and boards begin to look for an M&A Advisor, they often start in one of the big financial centers like New York or Boston. For most transactions under $100 million, I believe an M&A Advisor more than a couple of hours away by car is usually a bad choice.

One of the dirty secrets in the M&A Advisory business is large number of M&A Advisory engagements that fail to result in a successful transaction. It’s impossible to find statistics on this. Every M&A Advisory firm keeps their failure rate a closely guarded secret – many probably don’t even calculate their failure rates.

For over a couple of decades now, I have been asking every CEO, board member and investor I know to share their M&A successes and failures. My twenty years in YPO also provided a broad perspective on M&A transactions, both successes and failures.

Most Planned M&A Transactions Fail (under $100 million)

I used to think that at least half of M&A transactions failed. As I learned more, I realized that the percentage of times a planned exit fails to result in the company being sold is closer to 75%.

Failure Increases with Distant M&A Advisers

After hearing first hand about the success or failure of over a hundred transactions, I realized there were several patterns. One is that the M&A transaction failure rate increases as the distance between the company and the M&A Advisor increases.Distance to the M&A Advisor (in miles)
The reason the success rate decreases with distance is that the relationship between an M&A Advisor and a company, CEO, board, their accountants and their lawyers is intimate and intense. Even the smartest M&A Advisor needs a considerable amount of time to really understand the value drivers in a company, its strategic value and who the best potential buyers are.  Much of this work has to be done face to face at the company.

The middle part of an M&A Advisor’s job can be done remotely – the prospecting, qualifying and sales funnel building. But in the latter stages of the M&A process, during the auction, negotiation and closing, the M&A Advisor will be working close to full time to help the CEO and board close the transaction. Most of this work also has to be done in the same city as the company. This is partly because the selling company’s lawyers and accountants are usually in the same city as the company.

Another reality of M&A transactions is that inevitably, ‘stuff happens’. In some of the transactions I’ve been involved with, the deal looked like it was dead several times. These ‘near death experiences’ require immediate action to resuscitate. It might require reconsidering the entire transaction strategy, working through an unexpected snag in the agreement and/or working through the business – and psychological – implications of whatever deal factor that’s changed. This type of work is almost always unexpected, and requires face to face action on short notice. That’s just less likely to happen if the M&A Advisor has to factor in travel and hotels. Failing to resolve even one of these potentially fatal challenges  usually means the transaction is dead.

The really good M&A Advisors factor this in and will plan to spend up to half of their time in the same city as the company during the first third of the process and be ready to spend most of their time in the same city during the last third.

There are M&A Advisors who claim they can do most of the work remotely –  with only weekly visits to the company. Those are the ones that CEOs and boards should be wary of. Even in today’s hyper connected world, you cannot do a really good job as an M&A Advisor without a great deal of face time.

From the observations I’ve made, I believe the failure rate doubles with distant M&A Advisors. In other words, a hypothetical company using a remote M&A Advisor might have a failure rate of 50%, but with a local advisor the failure rate might only be 25%. For another company, the failure rates might only be 40% and 20% respectively.

Please keep in mind that these are very approximate percentages based on observations. There simply are no databases of exit transactions and M&A Advisor distance that could be used to precisely quantify this effect.

Distance Matters Less When Transactions are over $100 million

From what I’ve seen, this effect is significantly reduced when transactions are over $100 million. When an M&A Advisory firm is working on a transaction over $100 million, the fees are usually a few million. There are also often two, or three, senior individuals involved with deals over $100 million.

When the fees are in the multi-million dollar range, the M&A Advisors can afford to fly to the company almost every week and spend most of their time in hotels for many months. It’s also easier on their lives if they can split this between two or three senior people.

But this just doesn’t happen when the fees are below a million dollars. For sub-million dollar fee transactions, there is almost always only one senior person on each transaction. The economics, and human costs, just can’t justify more people, or the travel required, on smaller deals.

The A-Team Usually Works on the Largest Transactions

Another dirty secret, or obvious reality, depending on your perspective is that the best people in each firm will be working on the most valuable engagements. It’s also well known that the people the client meets during the sales process are often not the ones that will be doing the work after an engagement is signed. Similarly, many firms will put their B team, or even their trainees, on the assignments that are farthest from their office.

Reputation is also More Heavily Weighted Locally

This is where another dirty secret of the M&A Advisor business comes into play. Professional M&A Advisors know that every deal doesn’t end up closing. They build their business models, and manage their sales funnels and calendars, based on their knowledge that somewhere between a third, and two thirds, of the deals they sign up to do will probably fail. These M&A Advisors will still do OK on the deals that fail because their direct costs will be covered by the work fee.

Part of optimizing their business is knowing when to stop working with a company because the probabilities of success are too low. This is usually 6 to 9 months after they sign the M&A engagement.  At that point, if the transaction looks like it’s not going to close soon, many M&A Advisors will reduce the amount of time they spend on the company. Instead they’ll devote their time to other companies with new work fees and higher probabilities of success.

This is Especially Likely When the First LOI Doesn’t Close

In every M&A transaction, the company has to select a single prospective buyer when it’s time to accept an offer and sign an LOI (letter of intent). At that point, they have to contact the other interested parties on the short list and tell them they cannot continue discussions with them.

From the time the LOI is signed to closing is often around three months. If the deal falls apart after a month or two, the other prospective buyers have usually moved on to other opportunities and it’s usually quite difficult to get them back to the table.

When this happens, the M&A Advisor has to go back and rebuild the entire sales funnel. This is when I’ve seen many M&A Advisors throw in the towel – especially when they’re busy.

The challenge in rebuilding the funnel is that the M&A Advisor will have already contacted most of the best prospects. If they have to go back to the same buyers, the perception will be that they did not succeed the first time. This makes it much more difficult to build momentum on the second pass. It’s also psychologically much more difficult for the M&A Advisor. So they’ll be inclined to move on to a ‘fresh’ deal and blame the failure on the company, valuation expectations or a ‘difficult’ CEO or board.

It’s Much Easier to Give Up on a Remote Company

It is just easier for an M&A Advisor to give up on a company that is further from their office. When M&A transactions fail, quite a few people will hear about it. But those people are usually geographically close to the company. The negative impact to the M&A Advisor’s reputation will be similarly localized.

If the M&A Advisor is geographically close to the company, they will be much more likely to persevere to protect their reputation.

This is another factor that is much less important for transactions over $100 million. With these  larger opportunities, local effectively translates to most of the country.

For Under $100 Million You Really Should Chose a Local M&A Advisor

Many CEOs and boards engage remote M&A Advisors because they think that somebody from New York or Boston must be better than someone who lives within driving distance. Or they believe that domain expertise is an important selection criterion (more on that myth in a future post). In my experience, the perceived benefits are mostly psychological – it’s like that old adage about a consultant just being a regular guy a long way from home.

The difference in a simple consulting job might not be significant, but when it’s your company being sold, and it’s under $100 million in value, I believe you really should chose an M&A Advisor close to home.

What is an M&A Advisor?

What is an ‘M&A Advisor’? Why haven’t you heard the term more often?

One of the speakers at a recent Exit Strategies workshop in Vancouver (a well-respected senior M&A lawyer) commented that up until a couple of years ago he’d rarely heard the term ‘M&A Advisor’. He went on to explain that while there were certainly professionals helping to execute exit transactions, they didn’t often describe themselves as ‘M&A Advisors’.

At this same workshop, an attendee asked: “What is an M&A Advisor, exactly?” When I didn’t have a crisp off-the-cuff answer, I started to think about writing this article.

In my travels throughout North America, I’ve noticed that the use of the term ‘M&A Advisor’ varies considerably from region to region. In the northeast, people often use the term ‘investment banker’ – or ‘i-banker'; which is still the pervasive Wall Street-centric term for someone who helps sell a medium or large-sized company.

The farther you get from Wall Street, with the exception of possibly downtown San Francisco, the term ‘investment banker’ seems to be falling out of favor. I think this might be related to the negative publicity associated with the damage done to the global economy by the investment bankers who sold mortgage-backed securities. M&A Advisors I’ve spoken to seem to be distancing themselves from the term ‘investment banker’ as a result.

The term ‘M&A Advisor’ is also gaining popularity due to the increasing number of exit transactions in the $5 million to $30 million range. Just a decade ago, most of the press, and discussion, about exits focused on much larger transactions. Today, it’s increasingly obvious that the vast majority of transactions are in the under $30 million range, and the median size of private company exits is probably in the $12 million to $15 million range. As M&A activity shifts to these smaller and mid-sized transactions, more and more companies are looking for professionals to help design exit strategies and execute exit transactions in this size range. The term that is most often used to describe the professionals working to help sell this size business is ‘M&A Advisor’.

How does the term ‘M&A Advisor’ compare to the term ‘business broker’?

Professionals involved in helping to sell companies at values below $5 million are most often described as ‘business brokers’. I’ve been conducting an informal survey of professionals across the country to see if the use of that term also varies regionally. ‘Business broker’ seems pretty consistently applied for transactions below about $5 million in value.

When the definition of ‘business broker’ is discussed, people often say that business brokers facilitate ‘main street’ transactions. By that, they’re usually referring to the large number of smaller sized businesses including everything from restaurants, dry cleaners, retailers and all of the various forms of small service companies.

One of the primary distinctions between a business broker and an M&A Advisor actually does relates to the different methods used to facilitate exits below the $5 million in size. At valuations below $5 million, it’s not usually possible to do a ‘fully marketed’ transaction – one in which a team of professionals might identify as many as 50 to 100 prospects, qualify that list down to 12 to 15 who sign an NDA and then ideally end up with three bidders near the end of the transaction.

Most of the time, in business broker size transactions, there isn’t a competitive bidding process simply because these lower transaction sizes (and therefore fees) can’t justify that much front-end investment in the sales process.

Another important distinction between the popular use of the term ‘business broker’ compared to the term ‘M&A Advisor’ is the fact that business brokers are often licensed real estate brokers. In my experience, M&A Advisors almost never have real estate brokerage licenses. Many main street transactions include the property on which the business is based. The owners usually want to sell the business and the property together. If an M&A Advisor is involved in a transaction that includes a real estate component, they would usually separately engage a real estate agent to facilitate the real estate portion of the transaction – even if both are being sold to the same buyer.

The terminology also changes for much larger transactions

For exits over $50 or $100 million in value, the terms ‘M&A Advisor’ and ‘investment banker’ are used with approximately equal frequency.

There is currently no absolute answer to the question of “What is an M&A Advisor?” but I hope this article provides enough of a definition for general use anywhere in North America.

Please post a comment below if this differs from your experience on the use of these terms. Thanks, Basil.

The Exit Coach

“Exit Coach” is still a relatively new term. Today, many businesses are being successfully sold just two or three years from startup. This has created a need for a new type of professional engagement to assist young companies with the early stages of the exit process.

The exit coach typically works with the CEO, or Chairman, on exit strategy, planning and exit team selection. The engagement may end when the M&A Advisor is hired and the exit execution begins. In some situations, the company may decide to complete the entire exit themselves with help from an exit coach.

The primary role of an exit coach is to assist with:

  • The development of, and alignment around, a written exit strategy
  • An estimation of selling price and probability of success
  • A realistic plan, budget and timeline to complete the exit
  • Identification of specific action items necessary to complete the sale
  • The selection of the M&A Advisor and possibly other members of the exit team

Exit Coaches and Directors with Exit Experience

A decade ago, I rarely heard the word coaching used in a business context. Now, it feels like every CEO has a coach of some kind.

In some ways, this seems like a popularization of an old concept – the management consultant. But there is an important difference, driven by a fundamental shift in 21st century business.

In earlier times, most companies invested a lot of time and money into building a board of directors. As the company matured, the Chairman and CEO would start to recruit directors with deep exit strategy experience.

There are very few available directors who have been through a number of exits. So the recruitment process often took a year or two. And when they could be found, their compensation expectations, in both cash and equity, was more than most companies could afford.

Today, the scarcity of available director candidates, and the dramatically higher board compensations, make it much more challenging to build, and retain, an excellent board. The challenge is even greater when recruiting for directors with extensive exit experience.

Boards work for Shareholders – Coaches work for CEOs

Another difference is that boards work for the shareholders and have the responsibility for hiring, firing and managing the CEO. Coaches usually work for the CEO, or the CEO and a committee of the board.

Boards are hired by the shareholders at the annual general meeting and usually serve a two to four year term. Coaches work on a month to month basis for as long as the CEO finds the relationship valuable.

Most boards are primarily compensated with equity, and secondarily with cash. Coaches are usually compensated entirely with cash.

These differences create a very different business relationship – especially with the CEO. Many companies are finding that the knowledge necessary to design and execute an optimum exit can be applied faster, and more economically, with an exit coach rather than by recruiting directors with deep exit experience.

Everything Moves Faster Now

Today, it’s not unusual for a company to evolve from startup to a successful M&A exit in just two or three years. Even if the team wants to build at a more leisurely pace, most of their competition won’t. With most new business opportunities, the big companies will have acquired the best young companies within a few years of the opportunity developing. Once this happens, it’s much more difficult for a stand-alone, small company to prosper and certainly to be acquired.

This means everything needs to get done faster than before. There just isn’t time to spend a year or two recruiting experienced directors to help the team design the exit strategy.

Exit Strategy

A good exit coach can also be extremely valuable when companies develop their exit strategy. For many companies, this essential first step in the exit process can be the most challenging.

In some companies, with one or two decision makers, alignment on the exit strategy has literally been done in an hour. In other companies with more shareholders, or less homogeneous boards, I have seen alignment on the exit strategy take several quarters, including more than one weekend retreat with the entire board and management team.

This variability illustrates why exit coaching agreements should be flexible and scalable.

Valuation

An essential element in the exit strategy is valuation. This is another area where almost every company needs knowledgeable, objective external input. When boards start thinking about an exit, many make the mistake of paying for a formal business valuation. These reports are expensive, and are almost never required for a straightforward M&A exit.

The right exit coach can often give the CEO and board a more accurate estimate of the exit valuation as a ‘built-in’ part of the exit coaching engagement.

Exit Timeline

For many companies a more urgent question than “How much can we sell for?” is “How quickly can we complete a sale?” The standard (honest) answer is “about 6 to 18 months”. The reason for such a wide range is mostly due to the preparedness of the company and the resources available to get to fully prepared.

After a few sessions, a good exit coach will be able to work with the CEO to develop a realistic timeline and exit plan.

Recruiting the M&A Advisor

The most valuable contribution of the exit coach is often to assist the CEO and board with the selection of the M&A advisor.

Most companies do a poor job of selecting their M&A advisor. In the best case, this can delay the exit for several years or result in a sale for a fraction of what the company could be worth. In the worst case, selecting the wrong M&A Advisor can be fatal.

The job of selecting the right M&A Advisor is extremely difficult. There are many popular misconceptions and dozens of ‘dirty secrets’ about the industry. It’s extraordinarily difficult to get the information that’s really required to make the best decision. There is almost nothing written about the advisor selection process.

Every quality M&A Advisory engagement will be exclusive. That means that once the M&A Advisor is engaged, they are the only one who can sell the company. And regardless of how the sale occurs, they will be paid their success fee. The period of exclusivity is usually a couple of years.

This means that once the M&A Advisor is signed, much of the future success of the company can depend on the success of the M&A Advisor.

The Differences between an M&A Advisor and an Exit Coach

The M&A advisory engagement is long term and exclusive. It has a well-defined end – the sale of the business (or failure of that objective). An exit coaching agreement usually has no commitment and is completely scalable.

M&A advisory contracts almost always have a work fee and a success fee. The exit coach is compensated more like a professional accountant or lawyer – effectively on an hourly basis.

The Typical Exit Coaching Engagement

The variability in the time requirement creates a need for flexible terms in an exit coaching agreement. Financially, exit coaching engagements are very similar to the agreements with law firms or management consulting companies. The company and professional usually agree to a rough hourly rate, and the engagement only continues for as long as the company feels good value is being delivered.

The time that an Exit Coach devotes to a typical engagement is usually about one third ‘contact hours.’ This time might be face to face, or in phone or email communication with the company. Another third of the time involves communicating with other professionals, advisors or companies in the industry. A final third of the time is usually spent reading, writing and doing online research to evaluate elements of the strategy, ideas on prospective purchasers, and researching comparable transactions, etc.

The hourly rate for an exit coach is similar to senior securities lawyers or senior tax partners in accounting firms. A typical hourly rate for estimating this type of engagement is $500 per hour, plus taxes and travel. Most exit coaches prefer to make a time estimate and agree on a monthly fee and then adjust if necessary.

Typical ranges for an exit coaching engagement are from $4,000 to $15,000 per month, depending on what the company needs to accomplish, and how quickly they wish to accomplish it. Travel, expenses and taxes are additional.

The typical period companies will work with an Exit Coach before hiring an M&A Advisor ranges from a month to six months depending again on how quickly the company wants, and is able, to move. In some cases, companies will work with an exit coach all the way to the closing.

Exit Coaches Can Be Remote

To minimize transaction failures, M&A adivsors should be close to the company for exits under $100 million.

In contrast, exit coaches can be anywhere. The interactions with an exit coach can be done very effectively using Skype, phone, chat, email and screen sharing. In fact, this is so much more efficient that even when the exit coach is in the same city, most of the interactions will usually end up being electronic, rather than face to face.

Perception of Conflict

The knowledge and skills required to be a good exit coach are exactly the same as for an M&A Advisor. Usually, the best people who will entertain an exit coaching engagement are the people who would also like to be selected as the M&A Advisor for that company. Helping select the M&A Advisor is one of the most important functions of the exit coach. This can create a perception of conflict but it is probably more of an opportunity.

The exit coach and the company will have a considerable period to get to know each other – to evaluate the ‘fit’ and to really understand the exit opportunity. If the fit is good, this will definitely give the exit coach an advantage in being selected for the M&A Advisor. While this is, strictly speaking, a conflict it is also an opportunity for the company to really get to know one professional.

It also reduces the timeline to the exit because it allows the company to get started on the exit process before making a final decision on an M&A Advisor.

Your Input on “The Exit Coach” Concept

The concept of an “Exit Coach” is very new. I’m in active discussion with a number of professionals on how this type of engagement is evolving.

Please let me know what you think.

Great M&A Advisors Sell Companies for More

I’m not sure I should be typing this. It’s something I hate to admit about myself.

But the reality is all investors are subject to the same psychological imperfections. It doesn’t matter whether they are grannies buying ten shares of Google, or hotshot CEO’s acquiring billion dollar companies, none of us are so perfect that we are not susceptible to a great sales pitch. This is a really important consideration when selecting an M&A advisor.

None of us are so perfect we can’t be sold

I can admit it…. it just happened to me… again. I consider myself an astute investor focused on the fundamentals. I’d recently been watching a local company with a good CEO, but wasn’t absolutely convinced on the model or that it was a good investment.

One of my close business friends was working with the company to syndicate a financing. We had lunch to discuss a variety of topics. When I brought up this company I still thought the chances of me investing were one out of three.

My friend told me it was too late. The financing was sold out. I immediately took the bait. All of a sudden I really wanted to invest. I heard myself calling in favors and almost begging for an allocation. I wanted twice as much as I thought my maximum investment would be before I sat down. My friend wouldn’t promise me anything, but said I could talk to the guy managing the ‘book’ (the list of investors).

When I contacted the fellow who actually knew how the financing was going, he wasn’t even sure when it was closing. He showed no sense of urgency and seemed really happy to ‘pencil me in’ (add me to the list of investors.)

Right then I knew my good friend had sold me using one of the oldest tricks in the book.

We all want to buy something everyone else also wants. Even more, we want to buy something that is in such demand it’s hard to get. All (us) investors are herd animals.

I was a little unhappy with my friend for using such crude tactics on me. I knew exactly which of my human imperfections he used to close me, but I didn’t reconsider, or even reduce my investment. I guess I’m just not that perfect.

Some Salespeople are Truly Great

The valuable outcome of the fact that we all susceptible to being sold is that in every business there are a few salespeople who are truly great. My friend is certainly one. These greats are usually about 3x better than the average salesperson. Even when they have exactly the same pool of suspects (potential buyers) and exactly the same product or service to sell, they will close three times more than the other salespeople. I have seen this first hand in dozens of companies and situations.

The reason these ‘great’ salespeople are that much more productive is because they can connect to those universal parts of human psychology that make us susceptible to a good sales pitch. Some of these great salespeople do this with an unconscious competence – in other words, they don’t even realize what they’re doing. If you ask them, they just shrug their shoulders and say they are just ‘connecting with the buyer’ or ‘having fun selling’. But what is really happening is much more subtle.

These great salespeople can more effectively build a relationship, and interface at an almost non-verbal level, with the prospective buyer. They often know intuitively when and how to close the transaction.

When It’s Your Company Being Sold – Find a Great M&A Advisor

In industries with inefficient markets, and more elastic pricing, these great sales people regularly get much higher prices for exactly the same product. These are the sales people who are often described as being able to sell ‘ice to Eskimos”.

These ‘greats’ are the M&A advisors you want on your team when it’s time to sell your company. A great M&A advisor can account for a significant part of the additional 50 to 100% increase in price that is possible in most company sales.

Once you appreciate how an outstanding M&A advisor can make that much difference in the sales price of your company, no matter how much you have to pay them, it’s an attractive return on investment.