The financial advisor plays many roles in a mergers and acquisitions process. In this article, we discuss some of the issues that make a difference for entrepreneurs considering an M&A process.
Diagnosis
For the advisor, the process begins long before the parties talk. The advisor first gathers the company's relevant information and carries out a qualified diagnosis, identifying the key issues for the transaction to succeed. At this stage, the advisor analyzes the financial statements in detail, along with other information such as contracts, payroll, commercial agreements and the list of sales representatives.
Through this preliminary work, the advisor understands which contingencies may come up in the negotiation and correctly calculates EBITDA, net debt and working capital, anticipating the adjustments needed for these figures to withstand due diligence. A conversation with the shareholders also helps identify each one's expectations, avoiding surprises and disagreements later in the process.
Valuation
The discounted cash flow method is usually the main tool in the economic and financial valuation of the business, coordinated by the advisor. It considers historical performance and the management assumptions underlying the projections for growth, margins and investments. Market multiples and comparable transactions are used as complementary analyses to establish a technically defensible value range.
Conducted this way, the valuation supports the client's decisions during the negotiation and gives the business owner a strategic view of the company's value-creation levers.
Roadshow
Once the strategy has been agreed with the company, the advisor begins the roadshow to present the business, which may be more or less structured depending on the transaction format and time horizon. At this stage, networking, experience and the ability to reach investors and strategic buyers are decisive. Advisors often know certain markets well and have a competitive edge in conducting these approaches.
Coordination and negotiation
The advisor centralizes the conversations and uses all the material produced during the diagnosis and valuation to run presentations, answer questions and lead the negotiations. Another important role is taking emotion off the table, which, without an advisor, could harm the talks at critical moments. Without a dedicated M&A team, a business owner would hardly have the technical and operational capacity to run the process on these terms without losing focus on day-to-day operations.
Negotiations can take different turns, and experience across many transactions makes the difference in defining the deal structure. Price always matters, but gaps in expectations can be bridged with alternative structures such as phased transactions, earn-out mechanisms and future call and put options, among others.
Due diligence and contracts
After the memorandum of understanding is signed, there is still a long way to closing. During due diligence, the identified contingencies are negotiated and the calculation of net debt and EBITDA is verified whenever the transaction is in some way tied to these indicators – which is frequent. The advisor's technical knowledge is very helpful in these discussions. In the final phase, the advisor works with the lawyers to ensure that the contracts and their schedules reflect everything that was negotiated.
And when the client is the buyer?
On the buy-side, the advisor's role changes sides, but not importance. The work begins by defining the acquisition thesis: what kind of company makes sense, in which regions, size ranges and strategic-fit criteria. From there, the advisor maps and qualifies targets – many of them not formally for sale – and approaches them confidentially, protecting the buyer's identity until the right moment.
Once the target is engaged, the advisor organizes the information gathering, values the business and estimates synergies to define a price range and the maximum price to pay – the discipline of not paying more than the thesis justifies is one of the advisor's main contributions. The advisor also structures the non-binding offer with mechanisms that protect the buyer, such as price adjustments for net debt and working capital, holdbacks, earn-outs and guarantees, and coordinates due diligence with auditors and lawyers, turning the findings into price or contract adjustments.
Finally, the advisor supports integration planning and, when needed, the structuring of acquisition financing, so that the value foreseen in the thesis actually materializes after closing.
Post-transaction
Finally, a good advisor's work includes support after closing: helping the client in discussions about contractual provisions that may arise in the future and in resolving any disputes.
Understanding the complexity and breadth of these activities shows how the work of a good financial advisor goes far beyond simply bringing two parties together for a possible negotiation.