M&A advisors (series)

Ondřej Fryc

May 14th, 2021

Reflex Capital → Blog → M&A advisors (series)

Disclaimer: any similarity to actual events and persons is purely co-incidental 🙂

M&A advisors are used for selling companies, raising capital, various mergers and so on. In our series we will concern ourselves mainly with advisory mandates with regards to sale of companies. Such mandate, if done right, can make you a lot of extra money.

“Why advisor? There is nothing to it!”

Yea, sure. Like with everything. You can do it yourself, and for some smaller deals, that can be the best solution. Or you can hire someone, who has done it before and can get you a better price. At least, that’s the plan. You can try to save money and hire a cheap advisor. Or you can hire the big guns and pay maybe $5 mil. In this series, we’ll take a look at how to make sense of these services and what to watch out for. And we’ll share some behind the scenes stories too.

What could possibly go wrong?

We have extensive experience with selling companies. We’ve taken part in several large transactions, mostly in leading role (Ondřej or Eduard). We’ve worked with many foreign and few local advisors. We’ve watched many mandates from the outside. Eventhough we’re describing some juicy stories below, it’s fair to say that in most cases we were satisfied with the advisors and they got us a better deal, than we would be able to get ourselves.

Pirate advisor

The advisor signs a mandate contract for sale of the company, guaranteeing him the fee for the next two years. Then goes on to do nothing and later collects the fee anyway, when the company gets sold thru someone elses work. This can be sometimes seen with small one-man-show advisors, where we are on the buy side.

Advisor with conflict of interest

Advisor works well, until their own interests start to clash with their clients’ interests. This is not that uncommon, because sellers might prefer many other aspects over just the price (for example personal guarantees, conditions for founders who stay with the company, various deductible items etc.) Good boutiques work in their client’s best interest and their long term reputation is more important to them than short term gains. But sometimes the advisors get so blinded by the value of their fee (usually percentage of EV-Enterprise Value), that they go directly against their client’s interest.

This might reach even higher level, where the advisor makes a side deal with one of the potential buyers, or with one seller against the other sellers (there is usually more than one). In a fairly recent transaction, the advisor on the sell side made a deal with one of the buyers to get them financing from a bank (for a 1.5% fee) and this buyer also offered the highest EV. The sellers however preferred a different buyer, for various reasons and all hell broke loose. The advisor started manipulating the tender in the background to favour their selected buyer. They tried to turn the sellers against each other, blamed the lawyers, spoke ill of the other buyers and interfered in the meetings in such a way that the other buyers would just give up and leave. So instead of working with the advisor to get the best deal possible, we had to think of ways to neutralize the advisor to prevent further damage (all of this while paying them).

Junior advisor

You must pick your league right, the one you can actually play. It’s useless to get the major league advisor, if you don’t have a major league company. In that case, you will not be a priority for the advisor. The senior, who got sent to make the deal with will you will be quickly replaced by a junior to do the actual job, in order to learn something. This junior will not have the experience and he’ll just be good at making Powerpoint presentations. If you let them lead the negotiations, they’ll start calling prospects in  east coast US at their 6AM and then wonder why they won’t pick up and that it must mean they are not interested in the asset.

(to be continued…)

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