Friday, January 27, 2012

What is the role of a lead advisor Management buyout (MBO)

Written by Neil Ackroyd

A lead advisor is one of the most important roles in a Management Buyout (MBO) transaction. Typically he or she is the first person that you approach when you are given the once in a lifetime opportunity to do a Management buyout (MBO). The lead advisor is so named because they have the skills, experience and personality to lead you through the process but also lead you team of further advisors to the goal of completing your Management Buyout (MBO) transaction.

Your lead advisor must be your closest and most trusted advisor for the next 3-6 months of doing a deal. They know what you don't, they will cover your back from risks you don't know exist and guide you past pitfalls that you can't see. You don't have to be best friends with them but YOU MUST TRUST YOUR LEAD ADVISOR, otherwise it is very difficult for both of you. Therefore the most important facet of your lead advisor is INTEGRITY, not just you but the market as a whole must trust them. If you meet an advisor and their CV or experience doesn't stack up, walk away, there are plenty of real advisors in the world who do stack up.

Management buyouts are generally funded by Venture Capital or Private Equity. Cutting to the chase, these professions are exceptionally well paid. Given the old saying money attracts brains it is very true that VCs and PE players are some of the sharpest and most intelligent people I know. I know a VC who was a research physicist at Oxford University, then decided to go into management consultancy so joined the Boston Consulting Group for a few years before going into Venture Capital. That individual also speaks four languages fluently. He is not an isolated instance, many of my friends in the Venture Capital and Private Equity arena are qualified Doctors, research scientists, etc. Contrary to some public and press propaganda these are very very clever guys and girls. They will look very closely at the detail of your business to protect the money they are investing on behalf of their investors. Your lead advisor is your man playing man on man with these guys, its not about confrontation or contention necessarily, but if your main advisor is not on a par with your funders the problems that you will run into are really obvious.

It is essential that this individual, therefore, be able to fully understand and execute all elements of the process in a granular level whilst remaining focused on the big picture of completing the deal. This is why, particularly on a Management Buyout (MBO), your lead advisor must have an exceptional technical background. Here is a four point plan to help you understand what to look for in your lead advisor.

 EXPERIENCE AND INSTINCT - Assessing whether the deal is viable given the vendor price expectations and his knowledge of the funding environment is done through a combination of excellent technical skill, experience and finally a feel for the subtlety of a deal.

CONTACTS - Your advisor should typically have years if not decades of experience in dealing with the top funders in the city and quite often will have come up with some of the senior guys. This does not mean it is an inside job, rather it gives them some leverage on your behalf.

TECHNICAL SKILL/EXCEPTIONAL INTELLIGENCE - It is essential that your lead advisor has the experience AND intelligence to understand complex issues and financial structuring in your transaction. This is the principal difference between a lead advisor and a broker. Many brokers are effectively double glazing or used car salesmen, they have some skills but no real depth or substance, a lead advisor will not only have numerous professional qualifications but will also have passed their exams with exceptional marks. 

A TRUE LEAD ADVISOR WILL HAVE BEEN TRAINED FOR 8 YEARS PLUS BEFORE BEING ALLOWED TO ADVISE A CLIENT - If this isn't the case they will resort to table thumping in negotiation or just misunderstand issues and cost you money. Managing a management buy-out isn't rocket science but generally the guy managing it for you should have had rocket science as a genuine career alternative. A good trick when meeting a lead advisor is to give them a whiteboard and 3 minutes to explain structuring of a management buyout and how it delivers value to you. If they can't make that simple for you and just waffle, then they aren't your man.

Wednesday, January 25, 2012

Should I use a “Business Broker” or a “Transaction Advisor” for selling my business?

You are considering selling your business or someone has approached you to buy your business. Once you have a sense for the general differences between a Business Broker and a Transaction Advisor you will have a better sense of how their services help you to successfully achieve your goals.

While everyone’s business situation is unique the process of selling a business requires a number of skills, specific knowledge, and a high degree of commitment. Gathering the appropriate data, compiling accurate models and background resources, developing confidence in the business value, managing the overall process, and finding buyers can take a surprising amount of time, work, and skills.

You as the business owner have to decide how to engage the best “team” possible to successfully complete the sale of the equity.

We’ve heard of deals that were negotiated over lunch between educated and experienced buyers and sellers that lead to effective exchanges of payment and equity all done on the back of a napkin. While this might work for a very special few, please refer to our blog article from May 2011 titled “Buyer or Seller of the Business, Who has the Advantage?” for details on why this is not the best idea.

We also hear of cases where the business was advertised publically for sale and the staff quit, the clients left, and the bank called the credit line…not much to sell after that. In another case the business was strategically positioned to “profiled buyers” and a bidding war developed where the business sold for higher than asking price.

So, which type of service provider?
The marketplace has developed two primary service providers to help you sell your business; the Business Brokers & the Transaction Advisors. The biggest influencer for your decision will be the type and size of your business. You should understand what your typical Buyer would look like, how they will find you, or if you need to find them.

Regardless of the person’s title, every individual will develop their own system to complete transactions. For the sake of brevity we are referring to the generic common practice for two common service providers. 

Both Business Brokers and Transaction Advisors require:
1)      Some form of financial and current documentation providing evidence of sources of revenues, costs, assets & liabilities, and usually historical profits.
2)      An explanation of what your business looks like and the business model.
3)      Some sense of what the business looks like when you’re no longer working there.
4)      A sense for why you’re selling your “perfectly good business”.

Business Brokers tend to work along the following guidelines to achieve expectations (again…typically):
1)      Brokers like transactions with ready comparables for value reference. This information comes from a number of similar transactions to yours going on concurrently.
2)      Tend to base initial valuation estimates on rules of thumb built on those comparables.
3)      Tend to summarize the data and information provided into a standard format designed to allow the potential buyer to draw their own conclusions. i.e.: similar to MLS listing for homes.
4)      Tend to have a high level introduction discussion with the potential buyer and then have the business owner work through the process of point by point discussions.
5)      Tend to be a natural fit to the overlap of real estate and single location retail business operations. i.e.: consumer driven services like restaurants, car washes etc.
6)      Tend to take on the role of your “agent” which allows them to make commitments on your behalf. I.e.: as your “agent” your real estate agent has legal rights to represent you.
7)      Tend to share opportunities into the marketplace more along the line of the real estate model where various forms of blind advertising alert a broad range of potential buyers of the opportunity.
8)      Broker transaction size (as a general rule) tends to be smaller than other transaction advisory services. i.e.: Broker deals regularly have values less than a few million dollars.
9)      Average listing term: 60-90 days.
10)   Brokers typically do not charge Work Fees.

Transaction Advisors' typical process to achieve expectations (again…typically):
1)      Transaction Advisors require all the typical data and the necessary background documentation to support and prepare for the due diligence process.
2)      Tend to assemble broader financial models developing a number of formulas and calculations to support a formal business valuation based on several financial perspectives. 
3)      Typically develop a clear understanding of the business model in detail and learns the strengths and weaknesses within that model allowing them to strategically target specific discussions with specific buyers including identifying and cold calling them.
4)      Typically develop and manages the various strategies for negotiating with the multiple agendas of different types of buyers.
5)      Tend to interact with you and the buyers through a broad range of topics related to the transaction i.e.: business valuations, Human resources, modifying contemplated deal structures for tax strategies, deal financing, providing assistance to lawyers, etc..
6)      Transaction Advisors act as your team leader throughout the complete process including:
7)      Transactions tend to be larger. Transaction Advisory services range from multi millions to billions.  
a.      preparing the business to sell including appropriate valuations
b.      developing a comprehensive and accurate Confidential Information Memorandum
c.      profiling what the best buyer might look like, and identifying and contacting a target list
d.      strategically working to confidentially test the market for buyers, sometimes on an “invitation only” basis
e.      working very closely with the owners to work through the buyer qualification process
f.       manage negotiations, Letters of Intent, preparation for the final sale agreement
g.      working closely with tax advisors, legal advisors, and financial sources
h.      facilitating the completion of the successful “sale”
7)      Transactions tend to be larger. Transaction Advisory services range from multi millions to billions.  
8)      Average Engagement Agreement 12-24 months. 
9)      Transaction Advisors invoice work fees as all preparation work requires a considerable investment of time and expertise. 

Franchise Business Brokers:
There is a trend in North America for the franchising of the skills required to successfully operate a business brokerage business. The internal systems and procedures within those franchises strive to be built on the best practice model. While these tools are excellent resources to introduce individuals to process of selling their business there is no substitute for direct hands on experience completing transactions.

Who you choose to represent the sale of your business DIRECTLY impacts how successfully you will achieve your goal. 

Tuesday, January 24, 2012

Business Broker or Transaction Advisor: What is the difference?

While every Canadian province or USA state has their particular definitions and legal requirement, the basic regulations are as follows:

Alberta, Canada
The particular update that applies to providing advice on Buying or Selling a Business in Alberta is summarized in an update bulletin revised and published in 2009. To review the Real Estate Act update bulletin on Broker requirements, go to this page:

The Alberta Real Estate Act is considered one of the best in North America. To review the Real Estate Act itself, please go to this page:

What you as the business owner needs to know:

1) If selling shares only without any advice on leases, rental contracts, or land & building, you do not require a licensed commercial real estate agent.
2)  If selling assets only and without any advice on leases, rental contracts, or land & building, you do not require a licensed commercial real estate agent.
3) If you will require advice on leases, rental contracts, or land & building, you will require a licensed commercial real estate agent.

To comply with the Real Estate Act the MAXIMA Divestures Group Inc. owns and operates a licensed commercial real estate brokerage: MAXDG Commercial Inc.

Update to Real Estate Act - Last revised March 2009:
Summary: The term “business” was removed from the definition of “real estate” in 2008. However, when an individual is engaged to represent a seller or buyer in the sale or purchase of a business that includes a real estate component, the Real Estate Act will apply, but only to the trade of real estate. [See: Real Estate Act s.1(1)(u),s.1(1)(x)]
In July 2008, amendments were made to the Real Estate Act. The word “business” was deleted as a defined term and “business” is no longer part of the definition of “real estate” in the Real Estate Act.
If a person is hired to sell a business, for the purposes of the Real Estate Act, the following will apply:
  1. Where the sale of a business involves the sale of shares, whether or not “real estate” as defined in Real Estate Act is transferred as a result of the share sale, the Real Estate Act will not apply. Shares are being traded, not real estate and therefore the Real Estate Act does not apply.
  2. Where the sale of the business involves the sale of the business assets as opposed to the sale of shares and a business asset is “real estate” as defined in the Real Estate Act, the Real Estate Act will apply but only to the trade of real estate and not to other potential assets in the business sale.
  3. Where the sale of the business begins as an asset sale and later changes to a share sale, and a business asset is “real estate” as defined in the Real Estate Act, the Real Estate Act will apply but only to the trade of real estate while a business asset and not to the sale of shares.
As a result of the amendments, the Real Estate Act no longer regulates business brokerage. It is only the real estate component of any sale in business assets that is governed by the Real Estate Act.

USA transactions
Note: each state has particular regulations and co-regulations around real estate and mergers and acquisitions. The general rule for consideration is real estate in any form requires a commercial real estate licence.  To legally provide advice on the sale of a business typically requires some form of securities certification.
For clarification: To perform these services in the US, an advisor must be a licensed broker dealer, and subject to SEC (FINRA) regulation.  Other countries have similar regulatory schemes.
Financial Industry Regulatory Authority or FINRA -
It is common to see requirements for registration with Security Investor Protection Corporation -
For a Chartered Financial Analyst or equivalent -

There is one important exception for most of the North American market place: Lawyers are exempt from the general real estate acts and are allowed to provide a broad range of advisory services. While some restrictions apply this can be confirmed through your due diligence process.

To protect your investment and position in a transaction we strongly recommend you complete your due diligence on the regulations for your area particularly when you are being approached to sell your business by a “brokerage business” from another province/state.

Monday, January 23, 2012

Who do I call to Sell or Buy a Business?

As a business owner when you determine you require professional advice on the process of selling or buying a business, who do you talk to?

Your Business Accountant
While your accountant will definitely be a valuable part of the process to prepare and support a transaction, the fact is most accountants (not all) are not involved in the buying and selling of businesses on a continuous basis. This can impact you the business owner as the practice of applying general rules of thumb for business valuations and lack of expertise on current trends in fair market value of transactions inevitably leads to a lower transaction value. The difference is your money.

Your Lawyer
While your business lawyer will definitely be a valuable part of the process to prepare and support a transaction, you will benefit from engaging a lawyer that provides your team with experience and expertise in the buying and selling of a business. There are a number of legal firms which include a transaction advisory team for mergers, acquisitions & divestitures. They will have the expertise to protect your best interest in the fine “negotiating” and “papering” of the transaction.

It has been our experience transaction lawyers are great at the legal side however they require the buyer and seller be located and connected by some other party i.e.: Lawyers typically do not excel at cold calls and opportunity development. The difference is your money.

Your Transaction Team Leader
Titles for various roles in the Buying and Selling of Businesses:
  1.  Transaction Advisors  –  The MAXIMA Team acts as your Transaction Advisor to strategically manage and coordinate the execution of your successful divestiture or acquisition.
  2. Investment Bankers – Work for a financial institution that is able to assist you in raising capital by acting as your agent in the issuance of securities. Some specialize in strategic M&A transactions including asset purchases, and corporate restructurings. Are able to handle public and private transactions.
  3. Business Brokers – Assist buyers and sellers of privately held small businesses. A licensed commercial real estate agent (in AB) who may act as your agent in the sale.
  4. Individual Consultants  –  Individuals who feel they have enough experience in the field to comply with legal requirements, and are able to negotiate on your behalf.

Friday, January 20, 2012

What is an Integrated Financial Model?

Written by Neil Ackroyd

An integrated financial model is an essential element of any management buyout process. A fully integrated financial model will typically take a five year profit and loss forecast for the business, take the working capital cycle of the specific business to drive through a balance sheet and cashflow statement and then overlay a funding structure to demonstrate returns for all investors and the management team. That is clearly a very long sentence, but I didn’t want to break it down as it is all one thing. The model is also essential in writing a business plan that can be readily used by a venture capital, Private equity or Debt funder.  A five year financial model is the key to controlling the process and any subsequent negotiation. In my opinion, and contrary to some advice, it is the job of the lead advisory firm to structure and manage this.

A management Buyout (MBO) is a highly leveraged purchase of a business. What this means is that a management team is buying the business using borrowed money and as a result the new company (newco) has a great deal of debt. The result of this is that it is essential to manage cashflow very closely until that debt is repaid. At this stage we could talk about measuring and setting debt covenants as a reason for the model but it is much more simple and fundamental than that. The model helps you manage cash and therefore not do what businesses with no cash do. This gives us reason one for the financial model.


The investors lending the money are financial institutions who report to shareholders and investors. They have promised those shareholders and investors a certain return and they invest based on a business forecasting those returns. Depending upon the funder you are going to they will use different measures like Internal Rate of Return (IRR) or even a simple multiple of cash, in any event this gives us reason two.


The reason that the model is called a fully integrated financial model is that it should be complex enough for you to be able to sensitize it. What I mean by this is that whatever the risks or variables are in your business be it losing a specific contract or in an FMCG business maybe a downturn if 5% in turnover, the model should, at a stroke of a key, be able to recalculate this. This will mean that the operating aspect of the model (this part that relates to the business rather that the financing) should be bespoke for each business. I am only one man, however, my belief is that “standard” operating models, by this I mean ones where you essentially fill in field on your business and then it spits out a “standard” model are not as effective as a real bespoke model. In any event, if you have appointed a proper Lead advisory firm their fees will likely run into six figures and likely multiples of that. They should have the skills in-house to write a bespoke operating model.
Once you run these sensitivities the model should give new returns information. A good model should, as a minimum, give IRR for each equity funder as well as Mezzanine debt provider in a matrix format so that at one glance you can see the suit of potential returns based on exit multiple (the driver of price), exit year (when you sell the business), purchase price and management equity stake (HOW MUCH YOU GET). These will be used throughout the process and most essentially in two parts.

1.     When approaching funders and deciding who to work with (partly based on price and equity stake)

2.      When digesting the feedback from Due Diligence investigations (with an obvious effect on price and equity stake.)

So you can see that the model can be used to demonstrate arguments about why your equity stake should be higher or lower at key stages of the transaction. So let me ask you this question: Who do you think will have the best understanding of the financial model? The team who wrote it? So who do you want to write it and control it? Your advisor? Someone else?

Monday, January 16, 2012

Value vs. Price

It’s reasonable to assert that in most areas of life the end product is generally a reflection of the means to that end. This holds true in the acquisition and divestiture of private companies.

A well-planned methodical approach to the purchase or sale of a business will commence with an intrinsic-oriented identification of the fair value of a commercial enterprise. This applies to most small businesses and all mid cap and large-cap multinational corporations. That is, the value of a business as a singular investment among the supply of all types of investments carrying varying risk in an economy must be understood according to its demonstrated ability to generate consistent rates of return on invested capital in comparison to other assets or investment. Understanding the particular asset or company in this investment context is critical to the viability of the outcome of the purchase or the sale.

Defensible valuation analysis that considers the nature of the operating parameters of the business, risks to cash flows and the particular market dynamic applicable to the industry sector, provides a platform for pricing the Company. The proper identification of rates of return is essentially a gateway to the identification of value.

While the price a company ultimately fetches in the open market will reflect a properly identified range of value, other factors including the supply/demand curve for the business, the existing capacity to finance the purchase and the evolving tax implications will influence price and the structure of a transaction.

Accurate identification of the range of value will support pricing in negotiation as the Company comes under increasing scrutiny by a purchaser. On the other hand, the vendor can point to the economic “hot points” demonstrated by the business with a view to asserting the price position identified.

A clear and concise concept of value should provide the means to an effective and efficient result for both purchaser and vendor. It is therefore imperative owners looking to divest their share interests in their private companies retain transaction advisors who undertake to understand the detailed inner workings of the company and its true economic capacities to enable a high probability for an optimal outcome.

Ronald Kavanaugh CBV
Member of the Canadian Institute of Chartered Business Valuators

Friday, January 13, 2012

Two Potential Surprise Deal Killers

There's an old saying "failing to plan is planning to fail."

An experienced transaction advisor will have a plan to anticipate and address potential risk issues early in the transaction process.

We have learned the hard way to ensure both the Buyer and the Vendor are aware of any distribution agreement requirements and of significant reliance on one customer for revenues.

Case 1: Distributor for fire detection and protection equipment completes the sale of their business to private buyer. Upon advising Honeywell of the new owners' intention to attend the training classes, Honeywell exercised their “change of control” clause and terminates the distribution agreement. After all that time, energy and money…deal dead!

Case 2: Very successful oil field equipment supplier business has three clients; one client (EnCana) represents 85% of business revenues. Three days before the deal closes a field hand is flagged for not wearing a hard hat when on a field location. This happened to be the third safety infraction in a short time frame. All equipment returned to the shop and the Master Supplier Agreement was terminated within 48 hours. After all that time, energy and money… deal dead!

Look for an advisor with the experience and knowledge to help you navigate through your transaction risk factors.