As a business owner, you know your business and the value of expertise. As such, you should seek specialized advisors when executing strategic transactions around your company. Depending on what you want to do with your company, there are advisors appropriate for every circumstance.

Business Valuation Only

Business ValuationThere are a wide range of advisors, from independents, to accounting firms, to banks, who can “do a valuation”.

Banks and financial institutions generally calculate valuations in the context of merger and acquisition (M&A) or equity transactions (such as IPO) and do not charge extra fees for valuations. However, they are reluctant to do these outside of the context of an M&A or equity transaction, as their cost base does not justify the fair fees that should be paid for the work.

You and your company should be aware of the company’s valuation outside of the deal context.

As such, stand-alone valuation require consultants, accountants, or independent advisors who can execute a valuation as a separate project.

When choosing one of these advisors:

  • Ensure the advisor has the necessary technical, industry-specific, and region-specific expertise
  • Pick an advisor who will do a customized valuation, as opposed to a standard one
    • The valuation has to have an eye on potential investors, and be structured in a way that can be understood and defended for potential buyers of the business
  • Make sure you are not over paying for the service
    • An easy way to do that is to request quotes from at least two advisors
    • This will also let you assess expertise and experience

To be blunt, the biggest trap companies fall into time and time again is to get the valuation done by their accounting firm (the same one who does the audit). Not only does this create a potential conflict, but auditors are sometimes not very aware of the realities of the capital markets and M&A markets.

Mergers and Acquisitions

If you are looking to buy or sell a company or a stake in company, you should also take advice. The advice will apply to strategy, negotiations, structuring, and valuation. The valuation is an integral part of the advisory exercise, and the bidding or selling strategy that you adopt. I have been writing about business valuations for a while now and will start writing more on M&A strategies later.

A potential pitfall I have seen in MENA is to appoint a sole advisor to value the business on behalf of both buyer and seller. Consider having one advisor for both parties. This is the anti-thesis of the notion that valuation is part of the strategic advisory and negotiation package. Given valuation is NOT a science, there should be two opposing valuation theses being defended by advisors on each side of the table to reach a final deal price. A great illustration of this is that Investment Banks with high governance standards refuse to take such mandates given they cannot get comfortable with the conflict resulting from being accountable to both seller and buyer.

How to choose the best M&A advisor?

  • Ensure the advisor understands your company, industry, region and objectives
  • Ensure the advisor dedicates the right resources to what is likely a very important exercise for you.
    • Your advisors should not send the senior people to the pitch and then get the execution done by their juniors.
  • Price!
    • It may not be always a good idea to put advisors in competition on a sensitive / confidential M&A situation
    • Get the best price by negotiating and checking the market without disclosing the deal
    • With independent and boutique advisors, you can make significant savings on fees, particularly if you offer a small retainer as opposed to a pure success-fee only (which is the investment banking model)

Capital Markets Transactions: IPO, Bond Issue, Loan, Convertible etc.

While the same set of advisors (Investment banks, independents, consulting and accounting firms) can advise on an M&A deal or a stand alone valuation, capital markets transaction EXECUTION requires a significant additional level of capabilities.

  • A sales force that is specialized in the industry and region and has a proven track record of placing similar securities
  • Access via sales force and research to all required investors globally
  • Strong research (although research is independent from investment banking) which will educate investors about the offering
  • For debt deals, particularly loans, a strong balance sheet, credit and risk appetite that is adapted to your company

From an advisory perspective, the biggest pitfall new issuers can fall in is believing that the institution (typically a bank) who will EXECUTE the capital markets transaction is best placed to ADVISE them. Execution and underwriting are one thing, but advisory is another. There are potential conflicts of interest that can arise between the two.

For more on this, check I will also write a specific blog on this topic at a later stage.