Brokers considering mergers and acquisitions should expect the process to take several months, according to experts in the field, who also recommend they seek experienced consultants to coach them through such complex deal-making.

Although one expert delivering the practical advice was an intermediary who gets paid for M&A advisory work, representatives of potential buyers strongly supported the view during a panel discussion earlier this year at the midyear educational conference of the Kansas City, Mo-based National Association of Professional Surplus Lines Offices, Ltd. earlier this year.

“This is probably something that you're going to do once in your lifetime–maybe twice,” said Mark Watson, chief executive officer of Bermuda-based Argo Group International Holdings, Ltd., a specialty insurer. In contrast, a consultant that works on M&A deals daily is well aware of the pitfalls to avoid, he said.

“However much money it costs” to hire an adviser, “it's a rounding error compared to what you might leave on the table by trying to do it yourself,” Mr. Watson said.

The counsel was the same whether it came from strategic buyers like Mr. Watson or from financial buyers like Matthew Kelty, a principal for Allied Capital Corp., a Washington-based private equity firm.

Often, Mr. Kelty said, a broker might think that a near-term sale makes sense, but a consultant will advise the broker to hire an operating officer for six months or so before going down that path. The operating officer can set up processes that need to be in place before a sale, he said.

Giving an example, Gerard Vecchio, a managing director with Century Capital Management, a Boston-based PE firm, said he's asked brokers for a 2008 budget, only to get a list of expenses without any revenue information. “That may be exactly how you have operated your business year over year–we know we can't spend more than X–but our expectation is that we're buying into growth. We need the other half of the equation,” he said, referring to the sales pipeline.

The level of sophistication a broker has in terms of maintaining such financial data is a factor that can change the timeframe for getting deals done, he said.

Mr. Vecchio even if brokers are not looking to sell out completely to a strategic buyer, but just considering raising capital from a financial buyer, the process “is a full-time job–and by the way, you still have to run your business on a full-time basis.”

That's another reason to have an adviser, he said, adding that experienced advisers can help brokers understand the standard documentation of PE deals.

For example, he noted that some brokers don't realize a standard deal term is that PE firms require management to continue to own a certain stake after a deal is completed.

“We don't like to see them sell six months later,” he said. “You might not consider that standard,” but an adviser will explain why certain terms are in the documentation, he said.

John Kraska, who is a deal adviser for Hales & Company in New York, said the biggest problem he encounters involves brokers who are close to inking their deals only to realize that a producer has some ownership rights to part of the book of business. In other words, they don't really own all the revenue they're selling.

“You never want to get down to that at the last minute with one of these investors, because then the whole deal changes,” he said. What usually happens at this point is that the buyer starts to “hammer down and change the price” and the broker, having invested three-to-five months of time in the process already, agrees to accept it anyway.

An adviser will know to look out for those kinds of issues upfront rather than letting them crop up somewhere down the road, he suggested.

“Our role is basically to work with the management team, help articulate the business plan, sit down and understand what kind of buyer you're looking for,” he said.

Distinguishing his firm from some competitors, Mr. Kraska said Hales works to narrow down potential buyers at the outset. “We make it our business to understand what different buyers are looking for, and try to approach a relatively small group as opposed to blasting your business plan out to 50 or 100 people and conducting a big auction,” he said.

This helps to shorten the time line, he said, noting that brokers working on sales or capital-raising initiatives should typically expect to endure a three-to-six month process from beginning to end.

Mr. Kraska also advised against starting the process with a potential buyer on a one-off basis. “In my experience, you're never going to get the best results,” he said, noting that many clients come to him after having started down talking with one firm they're known for a while that expressed an interest.

This ends up taking a long time because that buyer's information requests may differ from others. “The next thing you know you're inundated with people asking a lot of questions,” he said. This can “tip the negotiating leverage into their hands,” he said, advising that it's better to try to manage the process from the outset.

Setting forth the likely time commitment for owner/ operators, Mr. Kraska said that after going through two-to-four weeks of preparatory work to create a “business-plan story” for the market and to identify people to approach, the next week or two will involve sitting down with the various groups identified for a couple of hours each day.

Buyers want to get a sense of the future direction of the business, and owners want to know what capital providers are all about.

Thereafter, the chief financial officer or accounting person does the brunt of the work, Mr. Kraska said, noting that there's usually a one- to two-month period after identifying the party to the transaction to go through complete due diligence and reach the final computation of the deal.

Mr. Watson agreed with the time line. “That's the right schedule from the date you decide you're serious and you really want to do something.” He added, however, “If you're just out trying to kick the tires, [the process] could go on forever.”

Likewise, Mr. Kelty said he'd seen brokers take as much as two years to get a deal done when they went out to market without a clear idea of what they were after.

“It's important to agree on what the endgame is going in,” said Mr. Watson.

Repeatedly, the speakers told brokers that a deal with private equity firm “is not an exit,” but should be considered a partnership over a limited agreed-upon timeframe.

To illustrate a situation in which it makes sense to team up with a PE firm, Mr. Kraska gave an example of a retail broker he advised–a Texas-based firm that came to him with the goal of finding capital to further expand in the Texas market, he said.

The typical strategic investor offered some cash or stock upfront and an earn-out–additional cash if the firm hit certain metrics over the next four years. “That's it,” he said, noting that broker opted to go the PE route even though that meant a smaller amount in their pockets initially.

With the PE deal, management continued “to own a good slug of equity going forward. They really believed in where the business it was going to go. They felt very confident it would double or triple in size, and they wanted to hold on to that upside,” he said.

Special Reports /

Brokers Warned Not To Go It Alone When Shopping For Buyers In M&A Market

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