Sell-Side M&A Advisors: How to Choose One, How Much They Cost, and The Importance of the “Fine Print”

My Guest

John Carvalho is the President of Stone Oak Capital, an M&A advisory firm that focuses exclusively on middle market businesses, with a specific focus on transactions between $10 and $100 million. Among other things, Stone Oak offers acquisition, divestitures, corporate finance and valuations services for its clients.

John is also the Founder of Divestopedia. Since its inception in 2012, Divestopedia has become home to a dictionary of more than 500 M&A related terms, thousands of articles on the exit process, and one of the world’s leading online resources for selling a mid-sized business. Divestopedia was founded alongside Cory Janssen, a co-founder of Investopedia.

In addition to his experience advising CEOs, John is also an entrepreneur himself, having co-founded Wolverine Energy Services Inc. in 2012 with an initial acquisition of a $5 million revenue oilfield services company. From the first acquisition to 2020, John and his business partner acquired 16 more businesses, grew revenue to $240 million and took the company public (TSX:WEII).

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Specific Questions and When They’re Asked

Selecting an M&A Advisor

  • (7:54) How important is it for an advisor to have experience selling companies in the specific industry in question?
  • (12:10) How should CEOs think about the size of their advisors relative to the size of their companies?
  • (14:22) How does a CEO know whether she needs an investment bank, a business broker, the M&A group within a Big-4 accounting firm, or a boutique M&A firm?
  • (17:17) What’s the best way for a CEO to perform due diligence on a potential M&A advisor?

Fees Charged by M&A Advisors

  • (22:21) How much should CEOs expect to pay to their advisors? What are some of the variables that can make this fee higher or lower?
  • (26:12) What are “work fees”, and are they typically netted against success fees if the transaction successfully closes?
  • (28:50) How does the success fee work in instances where components of enterprise value are contingent in nature (For example: An earn out)?
  • (33:22) How is the success fee impacted if less than 100% of the equity is being sold?
  • (37:24) Beyond the fee, what other contractual or economic terms should CEOs be carefully considering when comparing engagement letters between advisor A & advisor B?
  • (39:34) How long does the typical “tail period” last for?

Selling a Company: General

  • (41:32) How should CEOs think about trying to “time the market” when attempting to sell their companies? Does this represent common sense, or playing with fire?
  • (45:43) When you’re advising a sell-side client, do you tend to advocate for detailed LOIs or simple/high-level ones? Why?
  • (48:38) Some buyers attempt to shave value off of the purchase price in the deal’s late stages. How frequently does this happen, and is there anything that sellers can do to avoid this?
  • (54:52) The most frequently asked question that most sellers get from buyers is simply “Why Are You Selling?”. What buyers are really looking for when they ask this question, and what constitutes a “good” answer vs. a “bad” answer?
  • (59:48) How do you think your clients would respond to the following question: “What were the three most unexpected or surprising things about selling your company?”

Download a Written Transcript of Our Conversation

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Download the 2022 M&A Fee Guide

The Firmex 2022 M&A Fee Guide is the authoritative source on M&A fees for sell-side engagements in the middle market. I have personally used previous versions of this report to have more transparent conversations on advisory fees with potential M&A advisors.

Links to Resources Discussed During the Episode

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