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An Introduction to M&A Advisory

Kison Patel
CEO and Founder of DealRoom
Kison Patel

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

CEO and Founder of DealRoom

The world of mergers and acquisitions has consultants and advisors on all sides.

These range from investment banks acting as intermediaries on mega mergers, legal firms undertaking due diligence and contractual work, and even change management companies, who play an advisory role in the post merger integration phase.

M&A advisory is, by some distance, the most common form of intermediary in this industry. There are thousands of small M&A advisory companies in the United States, all seeking a small percentage of the US$3 trillion deal market.

We at DealRoom work with many M&A advisors proving them solutions for M&A. Below, we take a closer look at these companies, the work they do, and the role that they play in the industry.

What is M&A advisory?

M&A advisory is a broad term that describes the work that intermediaries do in mergers and acquisitions. Most of this is concerned with advice to buy-side and sell-side companies on their merger or acquisition, but M&A advisors also conduct market research and help firms to raise capital for M&A.

The drawback from a company’s point of view is that M&A advisors make most of their money from closing transactions (through sales commissions), creating an agency problem inherent in M&A advisory.

The role of M&A advisor and typical M&A advisor tasks

The principal role of M&A advisors is to provide advice to buy-side and sell-side companies on their merger or acquisition.

Typically, the company contracts the M&A advisor at the beginning of their deal process, endowing the M&A advisory with a mandate to take a more active role in their process in return for a retainer fee and a success fee - usually a percentage of the total size of the eventual transaction. 

A good M&A advisor can add significant value for a business owner, particularly one that has little or no prior experience in M&A.

They will originate suitable companies, make initial contact with other business owners and corporate development officers, advise on deal structure and company value, and take an active role in the buy-side or sell-side negotiations.

Their network should also give them greater insight into the prevailing deal landscape. 

As the introduction stated, the term “M&A advisory firm” is often used interchangeably with “boutique investment bank.

The reason for this is because, in addition to their core work on transactions, M&A advisors usually help companies with restructuring, capital raising, and other finance-related issues.

In this way, M&A advisory firms can often use their consulting on transactions to open up possibilities in advising on other internal financial matters.

So, what do M&A advisors do?

The following list is not exhaustive, but most of these tasks are common to almost all M&A advisory firms.

Not that this work can be conducted by M&A advisors for buy-side and sell-side clients:

  • M&A strategy development
  • Development of marketing materials (teaser, pitch decks, investment memorandums)
  • Buyer and target company valuation
  • Deal origination
  • Creating target company longlists and shortlists
  • Approaches to buyers and sellers
  • Conducting Initial approaches and negotiations with third parties
  • Deal closing 
  • Document preparation for deal closing (LOIs and SPAs)
  • Capital raising 
  • Company restructuring
  • Post-merger integration
  • Due diligence assistance

Why do you need an M&A advisor?

So, how does M&A advisory add value for companies? And what is actual value and benefits M&A advisor provides to the business?

There are essentially three different ways that M&A advisory services add value for companies:

  1. Expertise: Most important of all, M&A advisors are experts in the M&A process - the most complex and costly investments that any company can make. This includes everything from valuations to due diligence. The success of the M&A process will, to a large extent, determine the success of the buying company, so it’s important to get right. This is where good M&A advisory adds value.
  2. Market knowledge: The directors of any company will feel that they know their industry. But they may not know it as well as they think. Large M&A advisors spend millions every year ensuring that they obtain market winning research that includes issues beyond most companies such as the market’s transaction multiples, revenue and income of private companies, and more.
  3. Industry contacts: Through working continuously on transactions, M&A advisors tend to build up large contact lists. Want to buy a company in the UK? If your M&A advisor has an office in the UK, there’s a good chance that they’ll know somebody that knows somebody that can make a direct link with some of the largest companies in the UK. This door opening capacity saves time and money for the hiring company.

The difference between M&A advisory firms and investment banks

The principal difference between M&A advisory firms and investment banks is size.

First, blue chip investment banks such as Goldman Sachs, JP Morgan, and Morgan Stanley routinely advise on billion dollar deals. The resources involved at the high end of the market mean that it isn’t practical for these companies to look after the middle and lower markets, where deals can amount from anything up a hundred million dollars.

That’s where M&A advisory firms come in.

Investment banks are also bigger in other ways. While an M&A advisor tends to have limitations on what they can advise clients, investment banks have no such limitations.

Unlike M&A advisors, they have in-house legal teams, departments dedicated to market analysis, industry experts, and more. This is the kind of service offering which is beyond M&A advisory firms.

In fact, M&A advisors usually cannot help with legal work and an attorney will need to be hired.

How much does M&A advisory cost?

One detail which we omitted to mention in the section about the differences between M&A advisory firms and investment banks was their cost.

The world-class legal advice and industry research provided by investment banks doesn’t come cheap and usually runs into hundreds of thousands of dollars before a transaction has even been completed.

Success fees run for investment banks run into tens of millions of dollars.

By contrast, M&A advisory is usually adequate price for the lower and middle markets. The intense competition for new mandates means that M&A advisors are often willing to be quite flexible on their fees, sometimes even negotiating success fees only.

Success fees vary but typically amount to 5-10% of the total transaction value. Again, competition in the market means this can be bid down.

How to find a competent M&A advisor

Start by asking yourself, “what is a competent M&A advisor?” Is it an M&A advisor armed with a CFA and experience on Wall Street, or is it a small regional advisor with hundreds of small deals under his or her belt?

The answer to this depends to a large extent on your own requirements. There is so much competition in the M&A advisory space that it pays dividends to talk to a handful before beginning your process.

As a rule, M&A advisors will tend to upsell their industry contact book, with many of them claiming to have access to a network of several thousand companies.

Realistically, everyone with an internet connection has access to such a network and you should be cognizant of this before beginning.

The advisory process has a lot of serendipity. The advisor may just have a company which is a perfect match with your own. Or, they may be extremely competent and just be unlucky in which companies become available during their mandate.

Conclusion

The best way for any small or medium-sized business owner to think about M&A advisors is as investment banks.

They provide virtually all of the same services but at a different end of the market. That doesn’t make them any less valuable to your company.

Hiring a good M&A advisor can add significant value to your company’s M&A process by helping you identify opportunities and risks that you may not otherwise have been aware of.

dealroom

The world of mergers and acquisitions has consultants and advisors on all sides.

These range from investment banks acting as intermediaries on mega mergers, legal firms undertaking due diligence and contractual work, and even change management companies, who play an advisory role in the post merger integration phase.

M&A advisory is, by some distance, the most common form of intermediary in this industry. There are thousands of small M&A advisory companies in the United States, all seeking a small percentage of the US$3 trillion deal market.

We at DealRoom work with many M&A advisors proving them solutions for M&A. Below, we take a closer look at these companies, the work they do, and the role that they play in the industry.

What is M&A advisory?

M&A advisory is a broad term that describes the work that intermediaries do in mergers and acquisitions. Most of this is concerned with advice to buy-side and sell-side companies on their merger or acquisition, but M&A advisors also conduct market research and help firms to raise capital for M&A.

The drawback from a company’s point of view is that M&A advisors make most of their money from closing transactions (through sales commissions), creating an agency problem inherent in M&A advisory.

The role of M&A advisor and typical M&A advisor tasks

The principal role of M&A advisors is to provide advice to buy-side and sell-side companies on their merger or acquisition.

Typically, the company contracts the M&A advisor at the beginning of their deal process, endowing the M&A advisory with a mandate to take a more active role in their process in return for a retainer fee and a success fee - usually a percentage of the total size of the eventual transaction. 

A good M&A advisor can add significant value for a business owner, particularly one that has little or no prior experience in M&A.

They will originate suitable companies, make initial contact with other business owners and corporate development officers, advise on deal structure and company value, and take an active role in the buy-side or sell-side negotiations.

Their network should also give them greater insight into the prevailing deal landscape. 

As the introduction stated, the term “M&A advisory firm” is often used interchangeably with “boutique investment bank.

The reason for this is because, in addition to their core work on transactions, M&A advisors usually help companies with restructuring, capital raising, and other finance-related issues.

In this way, M&A advisory firms can often use their consulting on transactions to open up possibilities in advising on other internal financial matters.

So, what do M&A advisors do?

The following list is not exhaustive, but most of these tasks are common to almost all M&A advisory firms.

Not that this work can be conducted by M&A advisors for buy-side and sell-side clients:

  • M&A strategy development
  • Development of marketing materials (teaser, pitch decks, investment memorandums)
  • Buyer and target company valuation
  • Deal origination
  • Creating target company longlists and shortlists
  • Approaches to buyers and sellers
  • Conducting Initial approaches and negotiations with third parties
  • Deal closing 
  • Document preparation for deal closing (LOIs and SPAs)
  • Capital raising 
  • Company restructuring
  • Post-merger integration
  • Due diligence assistance

Why do you need an M&A advisor?

So, how does M&A advisory add value for companies? And what is actual value and benefits M&A advisor provides to the business?

There are essentially three different ways that M&A advisory services add value for companies:

  1. Expertise: Most important of all, M&A advisors are experts in the M&A process - the most complex and costly investments that any company can make. This includes everything from valuations to due diligence. The success of the M&A process will, to a large extent, determine the success of the buying company, so it’s important to get right. This is where good M&A advisory adds value.
  2. Market knowledge: The directors of any company will feel that they know their industry. But they may not know it as well as they think. Large M&A advisors spend millions every year ensuring that they obtain market winning research that includes issues beyond most companies such as the market’s transaction multiples, revenue and income of private companies, and more.
  3. Industry contacts: Through working continuously on transactions, M&A advisors tend to build up large contact lists. Want to buy a company in the UK? If your M&A advisor has an office in the UK, there’s a good chance that they’ll know somebody that knows somebody that can make a direct link with some of the largest companies in the UK. This door opening capacity saves time and money for the hiring company.

The difference between M&A advisory firms and investment banks

The principal difference between M&A advisory firms and investment banks is size.

First, blue chip investment banks such as Goldman Sachs, JP Morgan, and Morgan Stanley routinely advise on billion dollar deals. The resources involved at the high end of the market mean that it isn’t practical for these companies to look after the middle and lower markets, where deals can amount from anything up a hundred million dollars.

That’s where M&A advisory firms come in.

Investment banks are also bigger in other ways. While an M&A advisor tends to have limitations on what they can advise clients, investment banks have no such limitations.

Unlike M&A advisors, they have in-house legal teams, departments dedicated to market analysis, industry experts, and more. This is the kind of service offering which is beyond M&A advisory firms.

In fact, M&A advisors usually cannot help with legal work and an attorney will need to be hired.

How much does M&A advisory cost?

One detail which we omitted to mention in the section about the differences between M&A advisory firms and investment banks was their cost.

The world-class legal advice and industry research provided by investment banks doesn’t come cheap and usually runs into hundreds of thousands of dollars before a transaction has even been completed.

Success fees run for investment banks run into tens of millions of dollars.

By contrast, M&A advisory is usually adequate price for the lower and middle markets. The intense competition for new mandates means that M&A advisors are often willing to be quite flexible on their fees, sometimes even negotiating success fees only.

Success fees vary but typically amount to 5-10% of the total transaction value. Again, competition in the market means this can be bid down.

How to find a competent M&A advisor

Start by asking yourself, “what is a competent M&A advisor?” Is it an M&A advisor armed with a CFA and experience on Wall Street, or is it a small regional advisor with hundreds of small deals under his or her belt?

The answer to this depends to a large extent on your own requirements. There is so much competition in the M&A advisory space that it pays dividends to talk to a handful before beginning your process.

As a rule, M&A advisors will tend to upsell their industry contact book, with many of them claiming to have access to a network of several thousand companies.

Realistically, everyone with an internet connection has access to such a network and you should be cognizant of this before beginning.

The advisory process has a lot of serendipity. The advisor may just have a company which is a perfect match with your own. Or, they may be extremely competent and just be unlucky in which companies become available during their mandate.

Conclusion

The best way for any small or medium-sized business owner to think about M&A advisors is as investment banks.

They provide virtually all of the same services but at a different end of the market. That doesn’t make them any less valuable to your company.

Hiring a good M&A advisor can add significant value to your company’s M&A process by helping you identify opportunities and risks that you may not otherwise have been aware of.

dealroom

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