Should a founder with an offer on the table hire an M&A advisor?

Mar 12, 2024

With the increasing competition in the M&A space, both investors and strategic buyers are proactively reaching out to founders to establish early relationships.

In fact, a prominent sell-side advisor active in the tech ecosystem, conducted a survey among private software & internet companies that revealed how over 70% of companies with more than 25 employees received inbound interest from at least 10 PE firms over the past year, with over half of those companies having had over 25 PE firms reach out over the same period.

This influx of inbound interest may lead founders to consider running a transaction without the assistance of an M&A advisor, especially when acquirers suggest a "quick and easy" process without any intermediary involvement.

What founders need to take into account when deciding whether or not to hire an advisor

Founders should be cautious when considering a "for sale by owner" approach, as it may not be in their best interest. Here are some key factors to consider:

  1. A relationship does not guarantee a closed deal: Acquirers may express strong interest and even offer high preliminary valuations, but nothing is set in stone until the deal is closed. Founders should be aware that acquirers are skilled at selling themselves, regardless of their actual commitment to the transaction.

  2. Working exclusively with one buyer limits negotiating power: Having alternative options strengthens a founder's negotiating position. Agreeing to exclusivity with a single acquirer, which prohibits interaction with other potential buyers, can significantly diminish the founder's ability to negotiate favorable terms.

  3. Managing relationships with multiple buyers can distract you from the business: Attempting to run a pseudo-process by engaging with multiple acquirers can be a significant burden for founders, taking their focus away from running the business and potentially affecting company performance.

  4. A diverse buyer list increases the likelihood of a good outcome: The best fit for a founder's company may not be among the acquirers who reach out directly, but rather an investor or buyer who mostly relies on buy-side M&A advisors or investment banks for deal flow. A diverse buyer list provides leverage for negotiating the best outcome.

  5. Not all transaction terms are transparent to the founder: Valuation is often seen as the most important factor, but deal structure and terms can significantly impact the post-transaction payout and owner control. Navigating complex legal terms without the assistance of an experienced advisor can be challenging for founders.

Addressing these challenges with an M&A advisor

Working with an advisor can help mitigate these challenges by:

  1. Identifying serious buyers committed to closing a deal

  2. Creating competition to encourage buyers to escalate their commitment without exclusivity

  3. Allowing founders to focus on running their business

  4. Providing a diverse list of buyers and transaction options to improve negotiating power

  5. Leveraging expertise to negotiate favorable deal terms and increase enterprise value

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