Transaction advisory means exactly what it says: It is providing recommendations on a specific transaction. In the realm of business, it usually involves high-stakes business dealings.
Organizations typically consult a business advisor when they need information on which to base a significant decision, advice on which path to take, or help prepare for a considerable business undertaking.
Which business transactions merit transaction advisory services? Read on to learn about five of them.
1. Business Valuation
Do you want to know what your business is worth? You need business valuation services.
Business valuation is the systematic process of arriving at an accurate, objective, and reliable estimate of a business's economic value. It can yield the enterprise's current and projected future value.
Businesses require an estimate of their value for different reasons. The following is a non-exhaustive list of reasons a company may need a business valuation:
- To determine the baseline against which to compare future growth
- To set the price for shares
- To draft fair buy-sell agreements among business partners
- To obtain a business loan
- To get an investment
- To estimate progress
- To formulate an exit plan
Business consultants typically use one of three approaches to estimate business value.
Also known as the book value method, the asset approach arrives at the business value by diminishing a company's tangible and intangible assets by its liabilities.
The income approach typically uses forecasting models (and several declared and agreed upon assumptions) to estimate a business's potential future cash flow.
The market approach estimates value using the known value of similar businesses and transactions.
2. Financial Due Diligence
This is an investigation of a company's financial statements and records.
Financial due diligence is digging deep into individual entries on a financial statement and tracking down (and explaining) inconsistencies, if any. It involves systematically unraveling financial projections, bringing to light any premises used, questioning the validity of such assumptions, and testing the soundness of the forecasting methods employed, among others.
In other words, financial due diligence is checking the veracity of a company's figures, projections, and estimates to confirm that what a company claims in its financial statements and records is accurate.
Beyond that, it is also an attempt to bring to light any risks and red flags that may have to be addressed, that may give your organization the upper hand in any negotiations, or that may break the deal entirely.
Typically, you need financial due diligence done on a company if:
- You plan to invest in it.
- You are considering lending it money.
- You want to acquire or merge with it.
3. Business Plan
A business plan is a document that lays down an organization's objectives plus a detailed roadmap indicating how it plans to attain its business goals. If one wants to understand what a business is all about, how it works, and how it intends to survive and thrive, he can look at its business plan.
Why do you need a business plan? A business plan will clarify your organization's business goals and action plan. Armed with a business plan, business executives will have a clear basis for their business strategies moving forward.
You also need a business plan if you're planning to obtain an investment. Your business plan will:
- Highlight the opportunity you are taking advantage of or the market gap your business addresses.
- Specify your business model.
- Showcase your competitive advantage over your competitors.
A detailed business plan will also make clear why you need funding, how much of it you need, and how getting that funding will fuel your growth as a business.
4. Raising Capital
Do you need to raise capital for your business? A professional business advisory service provider can help you prepare for your funding round.
When trying to raise capital, your financial statements must highlight your strengths to potential investors. This is why financial literacy is vital for entrepreneurs. If you know how to read financial statements, you will understand how investors extract insights from financial data.
Of course, even if you are financially literate, it's still best to obtain the services of a transaction advisor when preparing your offering materials. A business consultant versed in helping businesses raise capital can:
- Help you with asset and debt restructuring.
- Advise you on the optimal financing structure.
- Help you draft and scrutinize your offering materials.
- Support you during negotiations to protect your interests and help you obtain beneficial terms.
- Drive the process post-negotiations to ensure prompt closure.
5. Merger and Acquisition
Mergers and acquisitions (M&A) is a blanket term encompassing any number of transactions that lead to the unification of two or more companies or the consolidation of their assets.
Thus, M&As can entail an outright merger, an agreement that combines at least two companies to form an entirely new business entity. It can also be a straightforward acquisition — i.e., a company takes over another by paying consideration to the acquired party. Such payment may be through a full or partial stock swap.
Other M&A types include:
- Tender offers: An entity makes a public offer to buy a company's stocks from existing shareholders at a premium price to acquire a specific number of company shares.
- Asset purchase: The acquiring party buys only the assets of the acquisition target company. In this type of M&A, the target company's liabilities are not transferred, and any contracts between the target company and its suppliers are terminated (and may have to be renegotiated).
- Management acquisition: Also known as a management-led buyout (MBO), it means someone from the company's current or former management (an executive, a founder, a professional management company, etc.) acquires part or the entirety of the business from its current owners. This buyout normally takes a company private.
If you're the party making acquisition overtures, you will need buy-side M&A advisory services to:
- Pinpoint potential acquisition targets.
- Perform business valuation and conduct financial due diligence on your targets.
- Draft your offer and negotiate the terms of the acquisition.
- Make recommendations when there are issues.
If you are the acquisition target in an M&A or wish to sell your company, you will benefit from sell-side M&A advisory services, which will help you:
- Identify potential buyers.
- Determine your business value.
- Prepare your offering materials.
- Structure the transaction.
- Negotiate the terms of the transaction.
Make Informed Decisions
You can consult a business advisor whenever you need to make a momentous decision or prepare for a significant business undertaking. This will help you uncover opportunities, identify and mitigate risks, and make informed business decisions.