Once a business owner has decided to sell their company, it is time to prepare for the transaction and then begin marketing the company for sale. Assuming that the owner has decided to engage an intermediary to represent the owner in the sale, the owner must decide the type of advisor to engage: more specifically, a generalist advisor or an industry practice group advisor, aka a vertical market specialist (“VMS”) that specializes in the owner’s particular market or industry. Owners should carefully weigh the pros and cons of working with a vertical market specialist versus a generalist. The goal, of course, is for the owner to choose an advisor, VMS or generalist, who will provide the best combination of service, guidance in positioning their company for sale, and execution of the strategy.
This is an important topic for owners to ponder (and ideally, answer) as they consider hiring an advisor — even more so if they plan to work with one that specializes in a particular industry or segment of the market. There is a lot at stake when choosing a business advisor with the right skills and experience to represent the owner’s business, including knowledge of industry valuations, transaction structure, terms, and key issues to address during the transaction. Choosing the wrong advisor could end up with a failed transaction, a transaction that languishes during the sale process, or a sale that fails to meet the owner’s objectives.
Taking a step back, while all business advisors are not created equal — their qualifications, areas of expertise, relationships, quality of service, and fee structures, vary, for example — most serve similar functions in the representation of business owners. These functions include helping sellers prepare for the transaction — from undertaking diligence to providing valuation guidance to identifying buyer candidates to marketing the business to negotiating major economic deal terms. The key to choosing the right advisor is determining what characteristics and qualifications are important to the owner, as well as those that are important to maximize the likelihood of a successful transaction.
To start, the size of the owner’s business may determine the type of advisor to hire. Business advisors often position themselves as intermediaries for certain size transactions (via minimum required fees) regardless of whether or not they are a vertical market specialist. Vertical market specialists in particular often will not undertake a transaction below a certain enterprise value due to the required return on their investment for being a specialist. Also, there may not be VMS’s in the company’s industry if the company serves a small and/or ultra-specialized niche that would preclude a VMS. As a result, the specialist versus generalist advisor decision may be self-concluding.
There are a number of benefits to choosing a vertical market specialist. For starters, they have specific and relevant experience. Their industry connections are invaluable — top advisors typically have a vast “rolodex” of potential buyers in the owner’s industry. They have solid relationships with these buyers and a strong understanding of the types of acquisitions that these buyers are seeking. Vertical market specialists also have a proprietary database of closed transactions that includes valuation multiples and transaction structures. To this end, leveraging these existing relationships and this knowledge can position an industry practice group as an ideal “matchmaker” when it comes to marketing an owner’s business to prospective buyers. The downside of working with vertical market specialists is, again, they generally have transaction size minimums or minimum fees.
There are a number of benefits to working with generalist business advisors as well. For example, while calling themselves generalists, many have closed multiple transactions in specific markets as well as a myriad of different transactions in many different industries. As a result, they bring that broad knowledge and experience to bear from a variety of different industries and segments of the market. In addition, they often have a greater ability to be more flexible than industry practice groups when it comes to representing different types of companies, regardless of size, deal structure, terms, etc. In addition, generalists typically have access to a wide variety of buyers, which can bode well for owners who may want (or need) to cast a wider net. Finally, as noted above, there are a number of industries that are not served by a VMS.
One downside to working with a generalist advisor is that it can be a challenge for the generalist advisor to reach the right point of contact at the strategic buyer and to have industry standing with that party. However, in a negotiated (non-marketed) transaction, reaching the right contact at the buyer has already been achieved, which reduces some of the vertical market specialist’s advantage. Lacking specific strategic buyer contacts, a generalist advisor may have to leverage existing professional relationships, such as accountants and attorneys, to reach the right contact at the strategic buyer and perhaps play “Six Degrees of Separation” to reach that buyer contact. For example, we recently had a situation in which we could not reach the right contact for a buyer located in Washington, D.C. However, we utilized a series of legal relationships to eventually reach the right point of contact at the buyer.
In business, they say “it’s all about who you know.” When it comes to selling a business, a more apt statement may be: “it’s all about who the owner’s business advisor knows.” When deciding whether to work with an industry practice group or a generalist business advisor, owners must weigh their options carefully and choose the best fit. Specialist or generalist, that “perfect fit” is an advisor who can effectively market the owner’s business, help them set a competitive valuation, deliver the “right” buyer, and help the owner achieve their objectives.
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