Where owners seek to exit a business via an outright disposal or merger, the key to success lies in assembling the right 'deal team' - a team with a mix of accounting, legal and M&A skills, writes Clinton Lee.
Most businesses tend to have relationships in place capable of providing the accounting and legal inputs. However, the key player in this team is arguably the M&A intermediary, whose job it is to source prospective buyers, convince them of the enhanced shareholder value the deal will deliver, get competitive offers from multiple parties and, last but not least, project manage and coax the delicate process along to completion.
However, for any business going through this process finding the right intermediary is easier said than done. There are over 400 business brokers in the UK, several hundred M&A advisers and a host of other players all providing essentially the same service. Their competencies vary widely as do their fees, their reach, their methods of operation and their sector specialisations. This article attempts to explain the main options.
Micro-cap intermediaries: Business brokers or business transfer agents
The vast majority of businesses listed by brokers are micro-cap or main street businesses i.e. those with revenue of under £5m (but more usually under £2m). Shops, pubs, B&Bs, post offices and restaurants form the bulk of broker listings. Costs to the vendor are largely results-driven. The "success fee" is high, sometimes 10-12% of the price at which the business is sold.
‘Back in the day’ a broker's Rolodex - his contact list - was what clients were paying to access. Today however, though brokers email new opportunities to buyers registered on their databases, they acquire most of their buyers through advertising on portals such as BusinessesForsale.com and RightBiz.co.uk.
The quality of service one can expect varies considerably; some brokers are competent, reliable and trustworthy, while others have gained notoriety and much bad press for the innovative ways in which they exploit clients.
Lower mid-market professionals: M&A advisers, corporate finance firms and others
M&A professionals tend to be formally qualified in business valuation, and often have extensive in-house corporate finance expertise. Some are established off-shoots of well-known accountancy or legal firms. While a few lower mid-market intermediaries take on sub-£5m businesses, the bulk of them operate in the £5m to £20m range.
Buyers are sourced via more discreet measures than the public portals used by brokers, and include 'anonymised' listings in various M&A databases used by industry insiders.
These intermediaries are adept at recognising strategic opportunities and usually even engage with the vendor's board to run strategic options analyses. Most also invest considerable research resources to ferret out other businesses, private equity firms and family offices likely to be a good synergistic fit and therefore see the most value in the acquisition.
Being research driven, and contributing significant value-add, these firms charge large retainers - in the tens of thousands of pounds - and success fees on completion of 2%-5%.
Mid-cap advisers: Investment banks, Big Six accounting firms
With retainers north of £100k these intermediaries aren't for any but the largest businesses, generally those with turnover of over £50M.
These firms have long standing relationships with strategy directors, P/E firms, institutional investors and other players. They rely on networks, connections and well-oiled relationships to source investors and develop deals. They keep tabs on who's making acquisitions in which space. They are also FCA regulated and approved to handle securities.
Apart from brokers, the others can always advise on various strategic options - divestitures, outright sales, MBOs, partial equity sales such as minority and majority recaps, reverse mergers, fund raising rounds, IPOs etc.
Clinton Lee is the founder of The Exit Firm, which owns and maintains an extensive UK broker and M&A intermediary database and knowledge base. He matches the exit needs of owners with the intermediaries best suited to their individual circumstances and exit goals.