Questions to ask when hiring an M&A advisor

When it comes time to sell your company, the right M&A firm or investment bank can make all the difference. From preparing a stellar offering memorandum, to running a well-organized process, to generating multiple offers, to negotiating the best possible deal for you, your advisor needs to bring the right mix of transactional skill, processes, resources, and chemistry to the table. This article presents several questions that you should be asking as you search for the right M&A advisor.  

Why do you want to represent my business?

  • In today’s market, a successful investment banker will turn away more opportunities than they accept. They need to know they’re a good fit for you and your business. And they need to be confident that they can successfully sell your business and meet your goals.  

What’s your fee structure?

  • M&A advisor fees usually vary with the size and complexity of the transaction. The 2022-2023 M&A Fee Guide from FIRMEX helps pull the curtain back on M&A fees, revealing what’s normal and customary for the industry.  
  • The bulk of the advisor’s fee should be earned as a success fee, when a deal closes. The most common success fee structure, used by 40% of survey respondents, was the Lehman formula in which the fee percentage decreases as the deal gets bigger. Roughly a third charge a fixed percentage, and 18% used an accelerator formula which gives the advisor a higher percentage on deals that exceed a benchmark price. According to the FIRMEX report, the most common fee for a $5 million deal is between 6.1 to 8%. For deals over $150 million, the most common fee is between 1.1% and 2%. 
  • Most investment bankers (81%) also charge an upfront retainer. According to the FIRMEX report, lump-sum retainer fees generally fall in the $26,000 to $50,000 range, while monthly fees fall between $5,000 to $10,000 a month.  
  • When evaluating advisors, consider whether their fees are similar to the above. If fees are significantly higher or lower, proceed with caution. The right fee arrangement aligns the advisor’s incentives with your own.  

What is your experience in selling businesses like mine?

  • Consider deal size and industry experience. Do they work on deals of similar size to yours?  Also, no advisor can be well-versed in every industry, but they may have partners with strong experience in your space. 

Who have you worked with in the past?

  • Ask to speak with a few past clients directly. Do they feel they got good value in exchange for the advisor’s fee? Was the advisor transparent and forthcoming with status updates? Did they do what they said they’d do? 

How many people will work on my deal?

  • An investment bank will typically have a team of people assisting with marketing, research, and managing the details of due diligence. Expect a mix of senior advisors with experience and contacts as well as more junior analysts to help manage the workload.  

How many other deals will you be representing?

  • Arguably, a lead advisor with a full team behind them could successfully represent four or five engagements at a time. Advisors with less junior staff generally handle two or three. Much beyond that, and they could lose focus or be unavailable to you at critical times.  

What is your success rate and why have deals failed in the past?

  • No investment bank closes every one of their transactions. There are many reasons deals fall apart, including unforeseen market changes, inaccurate business records, and shareholder conflicts, just to name a few. A successful advisor will be able to identify a lot of pitfalls ahead of time and may not take on higher risk deals. Asking this question can help you get a sense of how confident they are in their ability to sell your business, as well as how they handle bumps in the road.   

On average, how many offers do you get per deal?

  • You’re looking for an investment bank who can bring multiple buyers to the table at the same time. This creates an auction-like environment and gives you options to choose a buyer that’s the best fit for your goals. 

What’s your average over benchmark?

  • In the lower middle market, deals are marketed without a published asking price so as not to create an artificial ceiling on deal value. A benchmark is a private target price set between the seller and the advisor based on an objective assessment of the business and the market. An advisor who outperforms benchmark is doing the necessary work to obtain the maximum value the market will bear.  

How will you ensure the confidentiality of my business information?

  • Ask if you’ll be able to review marketing materials and buyer lists before information is released. Talk about other steps, including non-disclosure agreements, secure online deal rooms, buyer financial disclosures, and other tools that will be used to protect confidentiality and vet buyer inquiries throughout the sale process.  

Asking the above questions will help you gain a better understanding of an advisor’s qualifications, experience, and approach, and determine if they are the right fit for you. 

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.comExit Strategies Group is a partner in the Cornerstone International Alliance.