Deal Advisory: Definition, Scope, and Examples
Digital disruption, industry convergence, and increasing regulatory oversight have led businesses to rethink their approach to value creation in deals. Deal negotiation and structure are crucial for value creation.
What is Deal Advisory and Why Do You Need It?
Deal advisory is defined as a category of strategic financial services that help businesses evaluate and navigate deals to maximize value creation. Deal advisory services guide businesses on growth, functional capabilities, and develop a competitive edge over their peers. Deal advisory firms connect businesses with experienced financial advisors armed with data-driven insights to make sound transactional decisions. These professionals are experts in deal fulfillment; specialize in multiple disciplines, geographies and sectors to comprehensively evaluate the deal.
Deal advisory professionals look at the entire life cycle of the deal, and the business as a whole, to provide actionable, and practical advice designed to help businesses raise, invest, and preserve capital, minimize risks, deliver stakeholder value, and meet long-term business goals. Deal advisory professionals have profound experience in transactions, restructuring, and corporate finance across a range of disciplines and industry sectors. Deal advisors often observe transactions through an “investor’s/client’s lens.” They focus on helping their clients identify, evaluate, and employ growth strategies and maximize the returns.
Scope of Deal Advisory Professional Services
Deal Advisory professionals assist their clients throughout the deal life cycle typically offer the following services:
1. Due Diligence Advisory:
The process of due diligence involves three key perspectives:
Financial due diligence: It includes a careful analysis of the organization’s historical financial performance, financial position, liabilities, recorded and unrecorded contingencies, working capital, fixed assets, balance sheet adjustments, and core financial terms of the existing business contracts. The financial due diligence involves tax and legal, due diligence, business valuation, human resource, IT, and environmental due diligence.
Commercial due diligence: Deal advisors examine the target business’ relative market position, market conditions, and its ability to deliver predicted results. They identify critical business factors such as market trends and outlook, macroeconomic influencers, regulatory environment, the competitive position of the client company, and relationship with key customers and suppliers.
The integrated approach of combining commercial, financial and tax due diligence services gives the client a better view of the business.
2. Buy-side Advisory:
Acquiring an existing business is one of the easiest ways to get a head start in developing your market. Buy-side advisory helps you assess the business potential, screen targets, strategically evaluate targets, initiate discussions between the parties, execute the transaction, and close the deal. For example, a corporation that needs to raise money to build a new factory calls the deal advisor to understand the best option so their investment bank can issue either debt or equity to invest in the factory.
3. Sell-side Advisory:
When selling or divesting a business, advisors act as key links. They prioritize your objective for sale or divestment and develop the process accordingly. They are experts in cost calculations, legal compliance, help identify various types of buyers, and manage other aspects concerning a sale. For example, an asset management firm runs a fund that invests its high net worth clients’ money in alternative energy companies. Deal advisors help the firm look for opportunities to put that money to work by investing in the most attractive companies in the industry.
4. Debt & Equity Advisory:
Advisors guide you through the complete process of identifying the right form of finance, the right package of information, by skillfully sourcing the finance and negotiating the terms. They focus on some issues like recapitalization; financing or refinancing; acquisition financing; raise funds; and financial restructuring. Say, company ABC has a $100 million debt that it is unable to operate. The company offers 25% percent ownership to its two debtors in exchange for writing off the entire debt amount. By this, the company exchanges its debt holdings for equity ownership by two lenders in a debt-for-equity swap.
5. Integration & Separation Advisory:
Integrations come with multiple challenges and getting it right across four areas is: vision, control, people, and value. Typically, two-thirds of acquirers are unable to realize synergy targets in today’s competitive M&A market due to mismanagement of these four issues Deal advisors master both the unknown and business as usual. They deliver target and transition state planning, successful integrations, and long-term value.
From defining separation options and understanding the potential impact on value, deal advisors help you throughout the process and deliver successful separation plans. They consider it’s complex nature with divestitures, carve-outs, spin-offs, liquidations and IPO readiness.
6. Mergers & Acquisitions:
Mergers and acquisitions (M&A) can collectively be defined as the consolidation of companies. Merger, as the name suggests, is when two companies combine or merge to form a single entity, whereas an acquisition implies the takeover of a company by another. M&A deals occur with the objective of wealth maximization as the companies keep evaluating diverse opportunities through mergers or acquisitions.
Merger: Value is always associated with the joining or merger of two companies like gaining higher revenue, reducing expenses, or the cost of capital. There are mainly three types of mergers, horizontal mergers to surge market share, vertical mergers to achieve existing synergies and coaxial mergers to expand the existing product offerings. For example, mergers between Ernst and Young, Dow Chemical and, DuPont and Exxon and Mobil
Acquisition: In acquisitions, one company purchases all or a portion of a corporate asset or target company. In this deal, the purchasing company often absorbs most of the business functions and the brand. For example, acquisitions between HP and Compaq, Vodafone and Mannesmann and Aviva Friends Life (UK).
Deal advisory firms provide actionable and practical insights to resolve stakeholder matters and integration issues to help the client minimize risks involved and preserve value for the business. Deal advisory professionals help businesses plan and implement strategic changes to increase their portfolio and deliver tangible results. They bring deal success anticipated by their clients and see what they gained from the deal at hand, and what they want to get from the next deal down the road. Deal advisory services are offered by most major financial consulting firms and CFO services firms and are often provided as a part of a larger advisory offering.
Spice Route Finance is a leading CFO services firm with deep expertise in deal and M&A advisory. Check us out to understand how we can help you!