On September 21, 2021, JP Morgan Chase acquired Frank, a college financial planning platform for students, for $175 million. A little over a year and three months later, JP Morgan Chase shut down the Frank website and sued its founder and another executive for allegedly creating nearly four million fake customer accounts.
Preventing costly incidents like this is the reason transaction advisory services exist.
Of course, one might argue that JP Morgan Chase probably conducted due diligence, but that did not prevent the problem. This is true, but it just questions the quality and thoroughness of the due diligence rather than the need for one.
What Are Transaction Advisory Services?
Transaction advisory services refer to business consultancy services companies procure to get guidance and assistance on specific high-stake business transactions. JP Morgan Chase’s takeover of Frank cost the former a considerable amount of money. This is obviously a merger & acquisition (M&A) case and an example of a high-stake business transaction requiring transaction advisory services.
Other examples of business transactions that can benefit from transaction advisory include:
- Joint ventures
- Capital raise
- Business exit
In sum, any business transaction that requires a company to spend a considerable sum or give up a significant amount of equity is a high-stake transaction. If you’re in the process of conducting such a transaction, get guidance from transaction advisory professionals. Investment banks, management consulting firms, accounting firms, and business consultancy companies provide transaction advisory services.
Bringing an advisor on board will help you navigate the complexities of a business transaction. This will improve your chances of evading potential blocks and pitfalls, getting maximum value out of your transaction, and accomplishing the best possible transactional outcome.
Types of Transaction Advisory Services
The following are some transaction advisory services you can obtain from business consultants:
Financial Due Diligence
Are you planning to buy or merge with another company, or have you received a letter of intent from another company interested in acquiring you? In either scenario — whether you are on the sell side or the buy side — you must conduct due diligence to ensure that the other party has the financial capacity to make good on its offer (if you’re selling) or be profitable (if you’re buying). Ultimately, due diligence can help ensure you will come out ahead of your transaction.
The financial due diligence involves a deep dive into a company’s financial information.
During a due diligence investigation, transaction advisory consultants will conduct detailed reviews and assessments of the subject’s financial statements, accounting records, tax returns, transaction receipts, and many more. If the records say the company has 100,000 customers, due diligence requires that the advisors perform a random check to see if these customers are real, tracing transactions to specific customers, and ensuring entries make sense.
Business consultants will uncover undisclosed risks, tag red flags, and identify additional potential revenue streams. They will then give you a detailed analysis of a company’s current financial standing and future financial outlook, their informed opinion about the company’s solvency and profitability, and whether they recommend pushing through with or passing up on the transaction.
Legal Due Diligence
The legal due diligence involves investigating the legality of the transaction. It seeks to learn if the deal is legal and uncover potential compliance issues that may hinder its successful completion.
For instance, suppose a media company wishes to acquire a majority share in another media company. Through legal due diligence, the business advisor can determine if the transaction violates antitrust laws. If the acquiring company is a foreign entity, moreover, legal due diligence is required to ascertain that the transaction will not violate foreign ownership restrictions.
Uncovering a company’s existing and potential legal liabilities and vulnerabilities also falls under legal due diligence.
Operational Due Diligence
Operational due diligence entails investigating and analyzing the due diligence subject’s business model and infrastructure. Transaction advisors will look at the company’s organizational structure, business processes, and business systems to understand how the business operates, produces and delivers its products and services, and generates revenues.
During the operational due diligence process, your advisors will examine the company’s functional areas (e.g., procurement, distribution, and inventory management) to evaluate its efficiency, potential to scale, existing and potential operational risks, and ability to manage and mitigate such risks. They will also go over the company’s existing contracts (e.g., service contracts, employment contracts, partnership contracts, purchase contracts, etc.) to uncover potential operational issues that might negatively impact the value of the transaction.
Financial Modelling and Valuation
How much is the company (or the shares) you wish to acquire worth if you’re buying, and what is a reasonable asking price if you’re selling? If you’re raising capital, how much equity will you give up for x amount of money, and if you’re exiting a company, how much should you ask for your shares? These (and more) are the questions you can answer after a formal valuation by transaction advisors.
Transaction advisors use financial modeling to make financial projections and estimate the valuation of a business. There are various financial modeling strategies, but an experienced financial analyst will know which approach to use, considering the company’s industry and specific circumstances.
Financial modeling and valuation inform acquisition offer and counter-offer decisions. They give you a solid base from which to proceed with negotiations.
Transaction advisory services also include negotiation support. If you’re trying to raise capital, your transaction advisors can help you prepare your business plan and investor pitch deck. If you’re undertaking an M&A (whether you’re the seller or buyer), your business consultants can help you negotiate favorable terms.
You Need Transaction Advisors
Whatever high-level and high-stake business transaction is involved, transaction advisors can offer valuable assistance and support. Their work will help you play to your strengths, avoid risky ventures, and get as much value as possible from your transactions. At the very least, they will help ensure you do not neglect to do anything critical — like verifying that the millions of customers a company says it has are real.
Interesting Related Article: “Business Formation: Why Legal Services Are Essential for Startups“