At its core, an M&A transaction is a process of negotiation. Each party’s bargaining strength derives both from factors within their control and outside their control. Hiring an advisor is one way to improve negotiating power. While the benefits of hiring an advisor when purchasing a public company are well-documented, less research has focused on private companies. A recent paper, Does Hiring M&A Advisers Matter For Private Sellers? investigates the benefits of hiring an M&A advisor, and concludes that the decision can improve deal outcomes and drive valuations higher.
The Benefits of Hiring an M&A Advisor
The study identifies at least three reasons that reputable M&A advisors can add value. They include:
- M&A advisors act as intermediaries drawing upon economies of specialization. They have access to more information than most sellers, and can lower search costs. They assist sellers to identify and reach out to potential buyers. They can also help with valuation, and identify possible areas for improvement that may drive value.
- Private companies are typically sold at significant valuation reductions. Valuations almost always go lower, not higher. Research consistently finds that these discounts are often due to disparities in information between acquirers and targets. Private sellers tend to know less than public sellers, creating greater information gaps that can lower the final value of a sale. M&A advisors fill these information gaps, preparing sellers for a sale and leveling the negotiation table.
- Private sellers tend to have less bargaining power. They can’t benefit from mandatory disclosures or waiting periods, and are less well known. So valuations are inherently subjective, sales are less visible, and the bidding process tends to be less competitive. M&A advisors may increase bid competition, driving the final price higher.
What Sellers Say About Hiring an Advisor
To objectively assess the benefits of hiring an M&A advisor, research analyzed a sample of 4,468 transactions involving private sellers. The transactions occurred between 1980-2010. Researchers looked at factors such as whether a seller hired an advisor, whether the advisor was a top-tier advisor, the rate the advisor charged, and final sale price.
Private sellers were more likely to hire M&A advisors when there was a greater potential for gain, such as when a large private seller retains a top-tier advisor. They were also more likely to retain an advisor when a buyer had an advisor. This is consistent with previous data showing that sellers retain advisors to address information asymmetries. After analyzing the results associated with retaining an M&A advisor, the study found:
- Valuations were significantly higher when sellers retained M&A advisors, though the valuations were still lower than for comparable public companies.
- Hiring a top-tier M&A advisor offered greater benefits, driving value higher. Yet there was little evidence that these advisors charge higher fees than lower tier advisors.
- Announcement returns of sellers were lower when sellers used M&A advisors, suggesting advisors sharpen the bargaining power sellers possess.
This all reduces to two simple principles: Hiring an M&A advisor makes financial sense, and hiring a skillful M&A advisor confers significant value without costing more.