Thomas E. Kelso, Managing Director & Principal, Head of Downstream Energy & Retail Group, Spencer P. Cavalier, CFA, ASA, Managing Director & Principal and Cedric C. Fortemps, CFA, Managing Director & Principal

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Introduction
With the dramatic increase in consolidation activity in the downstream energy and convenience retail industry, more and more entities promote themselves as mergers and acquisitions (M&A) advisors, investment bankers and brokers. While on the surface these types of firms appear to be the same, there are clear differences between the types of services these firms provide, the experience they have providing those services, the expertise of their personnel, and approach they take in selling, valuing or raising capital for a company. There is also a clear distinction between firms that are licensed by the Financial Industry Regulatory Authority (FINRA) to conduct these activities and those that are not.

At Matrix, we have been providing M&A advisory services for over 30 years, and we obviously believe in the value that a skilled, licensed, independent M&A advisor brings to the table, especially for a client that is contemplating selling his or her company. Over those many years we have learned much about advising clients. While all clients and their companies are different, there are four fundamentals that apply to all: The advisor must (1) listen closely to the client’s goals; (2) work diligently to understand the situation and value the company in order to advise properly as to whether a client’s goals can be achieved; (3) maintain strict confidentiality throughout the process; and (4) always be an unfettered advocate by putting the client’s interests before anything else. This is how you build the foundation of trust, which is the cornerstone of any advisory relationship.

So in this day of heightened M&A activity, full of rumors and the inclination to rush, we wanted to refocus on the basics of sound and successful advisory and what that entails. Herein we hope to provide some basic information that you may find beneficial as you consider working with an M&A advisor in the future.

Role of the Advisor
What is the role of an M&A Advisor? An advisor serves multiple roles that include pre-transaction valuation and planning, brokerage, transaction negotiation and related advice.

Pre-transaction valuation and planning includes both an assessment and valuation of the assets or equity of the company to be sold and the development of a detailed transaction plan. These steps should be taken before you engage an advisor. The prospective advisor should gather the necessary data to value and evaluate the company, visit all or a substantial portion of the assets, develop a prospective buyers list, prepare a transaction plan to optimize value and structure, and then sit down with you to review all of it. From there, you and your prospective advisor should work with your tax and legal professionals to understand the tax consequences of a sale, and discuss issues related to transaction structure, representations and warranties, indemnifications, covenants, etc.

If all of these pre-transaction evaluation steps are done correctly by experienced professionals, then there should be few, if any, surprises once the company is presented to the market. Another reason that significant diligence should be done prior to a transaction is that if you believe the company is worth substantially more than the valuation, then your probability of success at your price target is very low and may not be worth the risk of exposing your business to the market. Our advice is to measure as many times as necessary before you cut once. Choose an advisor that has the skill and desire to do the work necessary to give you sincere feedback, not just one eager to get a client.

Once you have decided to move forward and engaged an advisor, brokerage consists of running and managing the sale process outlined in the planning stage. As a seller, you should approve all buyers before the advisor contacts them and insist on tight confidentiality throughout the process. A typical sale process has defined milestones for when prospective buyers need to make offers and a specific format identified for how offers should be submitted. By establishing deadlines and a consistent format for offers, you will have the opportunity to review and compare offers on an apples-to-apples basis. From there, counter-offer strategies are developed and ultimately a winning buyer will be chosen by you.

The advisory function provided by M&A firms is what knits the entire transaction process together. Advisory includes working in tandem with your lawyers and tax advisors to complete a process that maximizes the overall value (i.e. price and structure) to you through process, negotiation and tax planning, as well as minimization of post-closing liabilities. Advisory also involves working with you through what will probably be the single largest financial transaction of your life; along with all the attendant emotions you will inevitably encounter as you transition your life’s work or that of your family.

Role of Financial Analytics & Industry Expertise in Valuation, Brokerage and Advisory
The world of accounting, financial analysis, and valuation has always been complicated, but as our industry has expanded, private companies have grown and diversified, and more companies and partnerships are publicly traded, which makes having skilled, experienced financial analysts evaluate your company more important than ever. While many companies in the petroleum marketing and convenience retail industry provide similar products and services, rarely do any seem to account for and finance their operations in the same manner. Being able to extract and categorize economic cash flows properly is absolutely necessary to develop proper and reliable valuation models. This requires a team of investment banking professionals with real accounting, finance and industry specific backgrounds.

Once you have a base financial model built from which to develop a valuation, it comes down to applying fundamental valuation knowledge, industry experience, and empirical transaction data. It’s an iterative and collaborative process, which requires rigor and the desire to take the time to consider multiple scenarios. This process lays the foundation for a solid transaction process, tax, and deal structure plan.

One of the keys to determining the right valuation is understanding who the most likely potential buyers are for your business, as competition drives value. Surprisingly, the entity that may be willing to pay the most for your company may not be who you think and may be someone you are not familiar with, which is why making sure you have an advisor that has a strong working knowledge of potential acquirers from both inside and outside the industry is critical.

While it may take more time, be sure your M&A advisory team is comprised of professionals with the experience, credentials and desire to do the necessary groundwork instead of rushing into the sales process.

Role of Execution – Maximizing Value
All too often the post transaction media or discussion focuses on the multiple paid without looking at value achieved. The media and other outsiders do not, and often lack the proper information to, properly define EBITDA (i.e. store level, corporate level, best year ever, worst year ever, last year, trailing twelve months, last three year average or the buyer’s projected, buyer’s synergistic, normalized, etc.) from which the multiple is derived. If an advisor tells you that you can get an “above market” multiple for your business, you need to make sure they have done the valuation work necessary to explain to you how this translates to actual dollars received for your company. The multiple alone means nothing.

The best way to maximize value in a transaction is through detailed process planning, generating competition and maintaining leverage. This is a key point of the process because a poorly designed or run process will not put you in a position to maintain leverage over the buyer and open you to being re-traded right up through closing. Even good potential transactions can often breakdown at this juncture because a buyer feels they can re-trade the deal.

The Importance of Securities Licensing
FINRA is a private corporation that acts as a self-regulatory organization under regulations established by the Securities and Exchange Commission (SEC). FINRA licenses both member firms and individuals. An individual employed by a FINRA licensed firm cannot provide transaction advisory services to clients unless he/she holds the appropriate securities licenses.

Licenses typically held by investment banking professionals include a Series 7 (General Securities Representative) and/or 79 (Investment Banking Representative) and a Series 63 (Uniform Securities Agent). In addition, some members of the firm will also hold a Series 24 (General Securities Principal) and a Series 99 (Operations Professional). Licensed persons are required to perform continuing professional education (CPE) annually. Licensed firms are audited periodically by FINRA and information about FINRA firms and licensed individuals can be found through the FINRA website www.finra.org.

While some states do not require FINRA licensing for asset sales, statutes are clearer about the licensing required for the sale of securities including stock sales and debt placements. Since many times the form of a transaction is not known until the final offer is accepted and the purchase agreement is signed, you should consult your counsel about whether or not hiring a licensed firm is required. You should also discuss the potential penalty associated with not hiring a licensed firm with your attorney.

Conflicts of Interest
To whom does the advisor owe its fiduciary duty? Clearly the answer is you, the client, as the one who hired the advisor. The advisor should have no obligation to any other party in the transaction other than you and needs to serve you appropriately. With this in mind you may want to consider whether it is a conflict if someone tells you they have a buyer for your company, but they want to represent you. You should consider why, if they have such a buyer, they wouldn’t want that buyer to compete in a sale process against other qualified buyers. The role of an advisor is to help you maximize the value of your company and to help you understand the benefits of a competitive process. It is not to just sell it to a specific buyer unless, fully informed, you have made the decision to do so.

It is also a conflict for the seller’s advisor to receive any form of compensation from the buyer. If you, the seller, are the advisor’s client, he/she works only for you and whatever payment the advisor receives for their efforts should come only from you. Similarly, it is a conflict for an advisor to take a fee from a lender and/or investor in the buying entity, to own any portion of the buying entity without fully disclosing such ownership to you in advance, or to receive any other form of quid pro quo from the buyer.

There are also other potential conflicts you need to be aware of and you should satisfy yourself before hiring an advisor and confirm that the advisor’s fiduciary duty will be only to you. The most frequent conflict involves investment banks that provide capital markets work for public companies or companies going public. This is a repeat volume business for these banks, and they could conceivably be doing capital markets work for the buyer during the transaction or in the future. Another potential conflict is where the advisor has represented a buyer in another transaction(s) and now represents you where the advisor’s former client is also a potential buyer. A third potential conflict is where the advisor is or has represented a potential buyer in the sale of its assets. For all of these potential conflicts the best assurance is full disclosure by the advisor and full due diligence by you before engaging the advisor.

Summary
Selecting the right M&A advisor for your company involves carefully evaluating the many attributes that the advisory firm brings to the table. This will enhance and improve your chances of meeting your financial goals through a successfully managed transaction. You deserve and should demand that your advisor is independent and will rigorously value, plan and execute your transaction with the highest level of integrity and expertise. We hope that this information provides additional insight for your consideration when developing a trusted relationship with an M&A advisory firm.

Matrix’s Downstream Energy & Retail Group is recognized as the national leader in providing transactional advisory services to companies in the downstream energy and multi-site retail sectors.

Disclaimer

The contents of this publication are presented for informational purposes only. While Matrix Capital Markets Group, Inc. and MCMG Capital Advisors, Inc. (“Matrix”) believe the information presented in this publication is accurate, this publication is provided “AS IS” and without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranty of merchantability, fitness for a particular purpose, or non-infringement. Matrix assumes no responsibility for errors or omissions in this publication or other documents which may be contained in, referenced, or linked to this publication. Any recipient of this publication is expressly responsible to seek out its own professional advice with respect to the information contained herein.

 

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