I’ve been fortunate enough to be a part of a couple of offers for the company that I co-founded before eventually being bought out. As a result, I have seen both good and bad advisors for buy and sell side advisory services.
For those of you who don’t know what that means, usually, when your company is big enough and you’re looking to either acquire another company or sell yours, you hire someone who will give you advice and negotiate on your behalf. It saves you from getting personally embroiled in negotiations and it also provides an unbiased perspective about the true value of your company rather than the biased view that you’d have because of the endowment effect.
While I was privileged enough to have an OUTSTANDING sell-side advisor, we did encounter a buy-side advisor who was the textbook definition of what you would not look for in an advisor. Here are the characteristics which I saw that you should avoid like the plague if you’re ever looking for an advisor.
- Doesn’t understand basic math. At its core, valuation of a company is nothing more than algebra. Find a bunch of companies that are similar, look at the acquisition multiples, calculate averages, and make educated adjustments. Run a discounted cash flow analysis on the target. Determine walkaway prices. If your advisor isn’t mathematically nimble enough to understand ranges and to engage in a basic give and take in negotiation, then you’d better have a great offer in the first place, because you will get one shot before this type of advisor gets run over by numbers. Innumeracy in an advisor where valuation, and, hence, mathematics is the name of the game will chop your legs out from under you.
- Tries to use bullying as his primary tactic. Bullies are successful when the target is scared. They fail miserably when the intended target isn’t scared. Unless you’re Sam Kinison, yelling isn’t part of your job description in a professional setting. Yelling and derogatory language is not the same as grounded, reasoned logic, and, if the sale actually goes through, will sour the subsequent relationship. Remember, you’re buying because you want something from the target. Using a Napoleonic scorched earth strategy isn’t the best approach for maximizing post-acquisition value. This feature usually comes up because the first feature is also present.
- Doesn’t understand the nature of the business he represents. The corollary to this symptom is doesn’t understand the nature of the target business. In our situation, the buy side advisor had only the vaguest sense of the nature and strategy of the business he was representing, and he clearly did not understand the business he was being sent in to negotiate to acquire. Because of his lack of understanding, it took a long time to even bring him up to speed on the relative positions of both companies, and reduced his negotiating strategy to the one I described above – brute force.
- Doesn’t have the authority to negotiate. On several occasions, we were able to negotiate scenarios and concessions from the buy-side advisor which we thought made sense for both parties, and, since he’d agreed to them, we moved on further in negotiations. However, he would then present his “concessions” to the owner of the business he was representing, and had to come back to the table having backed down from previous concessions. Whatever scintilla of authority he’d previously possessed vanished, and our advisor was ruthless in pointing out his negotiating impotence from that point on. Don’t send your representative out to negotiate if he has to come back to check with headquarters for every decision; if you’re that micromanagerial, then do the negotiations yourself.
It was a shame that the company we were discussing the transaction with had hired such a poorly equipped representative to negotiate the deal. I believe that, in the scenario I am relating, we could have made a deal, as there was a zone of potential agreement. However, since we’d been forced to rehash the same ground so many times, by the time we got close, negotiating fatigue, and, at least on our side, distrust had set in so deeply that in the end we agreed to walk away and remain friends.
I’ve seen what a really good advisor can do to represent your business, and I’ve seen what a really bad advisor can do to torpedo a deal, and I know which one I’d rather have!