Selecting the right transaction advisor may be the most important driver of your deal’s success.

Planning your exit shouldn’t be a last-minute affair. Ideally, you should establish a formal relationship with an advisor two to three years before you expect to sell. Not only will this afford you the time to establish trust, but it will also give you the opportunity to plan and enact strategic actions that will best position your company for sale. 

The traits of a transaction advisor that are most critical for a successful sale vary with the size and complexity of the business, its capital structure, and the desired deal terms. If you are the owner of a small or mid-sized business searching for an advisor for your sale, realize that not all transaction advisors are cut from the same bolt.

Pinning down the factors that will be most important to your deal will help you with the important decision of hiring an advisor. In the mergers and acquisitions intermediary universe, business brokerage has been compared to listing your home for sale, the implication being it is mostly about a little spring cleaning followed by resting the opportunity in the market and hoping it elicits some interest. It is true that the sell-side process conducted by business brokers for small and mid-sized businesses, by its nature, is more passive than that conducted by M&A advisors and investment banks for larger companies. But you are hiring an intermediary to close your sale, not to give a third party free dibs on a piece of a transaction they may or may not drive to completion. Here are some of the questions you should ask a prospective transaction advisor.

Does the advisor have the right kind of experience to handle your deal?

• What comparable transactions has the broker completed in the past 3-4 years? A small or mid-sized business often won’t require specialized industry experience on the part of the intermediary.  But the broker should be able to cite examples of deals they completed that give them relevant insight into how to navigate your transaction. Whether the intermediary you are considering is a business broker or an M&A advisor, how do they intend to find the right buyer given your company’s size and industry?

• What is the advisor’s estimated range for your company’s value? Expect the broker to be able to discuss current trends in M&A activity, average earnings multiples appropriate to your industry and company size, and other factors that impact valuation. An experienced advisor should be able to provide a ballpark range for your business’s value.

• What other services does the advisor foresee you needing in connection with the transaction, and what help can they provide to connect you with reliable service providers?  Sellers need legal support to close a transaction, and may need other specialized services, including financial accounting, tax, insurance, estate planning, and wealth management advice. An experienced intermediary will inquire about the vendor relationships you have in place to cover your needs in those areas, will recommend contacts that allow you to leverage their network, and will coordinate with your service providers as needed throughout transaction planning and execution.

How invested is the advisor in closing a sale for you?

• How many clients has the intermediary advised in the past 3 years that did not sell, and what were the reasons? There are many reasons why a company may not sell. But getting an advisor’s perspective on what thwarted these deals will give you some perspective about how selective they are about taking on clients, and how intent they are on managing each project to a successful outcome. This is particularly true if you are engaging a business broker, where you generally pay no fees unless your transaction closes, and the full range of intermediary incentives to keep the deal on track are not in play. The advisor should be willing to provide references, so that you can obtain their clients’ perspectives on how intense and sustained the advisor’s efforts were on their transactions.

• How is the deal team organized, and what are their roles and responsibilities? Many brokers are one-person shops, and that may be just what you need if you have independent and objective evidence that you are exit ready. But asking this will give you some insight into the intermediary’s sale process. The transaction advisor should be able to articulate who is expected to perform key tasks, what commonly derails the process, and what they do to keep things on track.

• How many clients is the advisor currently serving? This should give you an idea of how the advisor allocates time and attention among clients, and shed more light on their sale process.

Does the advisor have a handle on what it will take to ensure your company is exit-ready?

• What does the advisor see as the key indicators that a business is ready to undertake the transaction process? The intermediary should be keenly interested in aspects of your business on which buyers will fixate. These are your risk/success factors, and include strength of the management team, diversification of the customer base, whether documented policies and procedures are in place, whether the business has accurate and informative financial statements, and whether the owners have a well-articulated strategy for dealing with changes in the market for the company’s goods and services.

• What recommendations does the advisor have for preparing your business for sale? Getting to know you as a prospective client should allow the advisor to identify some of the areas that merit attention. Even if marketing your business for sale right away is not a prudent or even realistic option, the advisor should be able to offer advice on growing revenue and profitability, including talking through opportunities for market expansion and vertical integration.

• What are the biggest mistakes the advisor has observed clients make when contemplating a sale transaction? Not all failures to close a sale are avoidable. But the silver lining for most is that they do offer a cautionary tale for future deal participants. Find out what lessons the broker has learned from the past mistakes of owners they have advised, and what advice they would offer you as a result.

• How would the advisor describe one of their smoothest engagements, and what the owner did to set the transaction up for success. This is an opportunity not only to gain insight and education on how to position yourself for a successful exit, but to further assess the advisor’s mastery of the dynamics of successful deal intermediation.

How does the advisor expect to be compensated for their services?

• What is the advisor’s fee structure? Larger companies typically employ investment banks that charge a combination of a retainer, milestone, and success fees. This is also typical of lower middle market (LMM) companies who utilize M&A advisors to run their transaction. Smaller companies often use business brokers, who may structure their compensation entirely in the form of success fees for clients with relatively straightforward exit paths. But if your business requires more work to prepare it for a successful transaction, a fee structure that covers the advisor’s investment of time and effort while still leaning heavily toward a success fee component may be the optimal incentive structure. After forming an understanding of your objectives and business situation, the advisor should be able to clearly articulate the reasoning behind their fee proposal.

Perhaps as important as the questions you ask a prospective advisor are the questions they ask you. How are they responding to your objectives for the deal beyond price? Through your discussions, you’ll determine whether you trust them and have confidence they can drive the outcomes you want.

You don’t select an advisor by sorting through applications. Intangible qualities are important in an advisor, so give yourself a chance to interact with them. How do they treat people around them? How do they interact with you and others on your team? Do they follow through when they say they are going to do something? It takes time to form these impressions, so it’s rarely too early to start evaluating your options.

Ultimately, the best fit for you will be the advisor with the ideal mix of competence, experience, integrity, and alignment with your interests. Focusing on the considerations above will help you make a solid choice for the lynch pin of your deal team.