A financial adviser, like a lawyer, may be an effective advocate of a client’s interests and provide valuable advice that can make the difference between success or failure of a transaction, or provide advice whose implications may be measured in many millions of euro.

And yet there seems to be a pattern of questions and expectations that reveals a lack of understanding of the limitations surrounding the role of financial advisers. I summarize these in the following three "don’ts" to bear in mind when hiring a financial adviser.

Guesswork
Do not expect an adviser to estimate the value of your company before you hire him – the potential for error in such a rapid, back-of-the-envelope valuation is enormous.

A thorough valuation usually requires use of multiple methods (discounted cash flow or applying appropriate multiples). A quick valuation is done solely on the basis of multiples, making it usually much less reliable than the discounted cash flow method. Furthermore, when you apply multiples to perform a valuation, there is a risk of magnifying the error if you are multiplying the wrong number.

For example, if a business is valued at six times the cash flow and the company’s owner pays himself a salary that is 100 000 euro below market salary, the company will be overvalued by about 600 000 euro. The financial statements of a company must be carefully examined before applying multiples.

Furthermore, there may be a number of factors unknown to an adviser who has not had the chance to look at a company thoroughly. What if there is litigation or a threat of litigation against the company? What if the company is about to lose its most important client? What if there is new technology on the horizon that is about to disrupt the industry? In any of these cases, a quick valuation is likely to be highly inaccurate.

So how should a client handle the issue of valuation when hiring an adviser? Ask questions that ensure your potential adviser thoroughly understands the principles of valuation and has experience in the subject. If your decision to proceed with a transaction or not depends on valuation, the first few weeks of a mandate should permit an adviser to provide an estimate of valuation and the client’s decision to proceed with a transaction could be conditional on the adviser arriving at a threshold valuation.

Jumping the gun
Do not ask an adviser to introduce an investor before you give him a mandate. All too often, a client will ask an adviser to bring a potential investor to the table before giving him a mandate and proceeding with a transaction. This is usually an error, for two reasons.

First, in the event that the investor is interested, the company will typically be completely unprepared to follow through – it might be unable to provide the interested investor with the huge amount of information he is likely to require, a disclosure which typically requires months of preparation.

Second, if the company starts down the road of negotiating with one investor, it becomes more and more difficult to bring other potential investors into the process. In this way, the company foregoes the possibility of entering into a truly competitive process, a process which usually has the effect of driving up price, improving the terms and conditions of a transaction and improving the likelihood of closing a transaction.

So what should the owner of a company do? Simple – allow an adviser to prepare the company appropriately, then bring multiple investors to the table in a competitive process.

Pay the man
Do not expect an adviser to work for a success fee only. As the saying goes: if you pay peanuts, you will get monkeys. As with any hiring situation, ensure that the individual or company you are hiring is appropriately motivated.

Given that a client usually has the liberty, at any point in a transaction, of refusing any offer, or indeed even calling off a transaction, an adviser working on a success fee alone is unlikely to invest the time necessary to do a thorough job or may be motivated only to "skim the cream", namely try to opportunistically close a transaction with just the bare minimum of preparation or proactive marketing. This is seldom in the client’s best interest.

In the socialist period, tangible items had value; intangibles, including advisory services, were seldom, if ever, attributed value. Central Europe is rapidly evolving towards a capitalist market system, where it is becoming increasingly acknowledged that intangibles, including advisory services, are often at least as valuable as tangibles. While this understanding has evolved considerably over the past two decades, there is still a fair distance to travel.

*Les Nemethy is the CEO of Euro-Phoenix Financial Advisors Ltd. (www.europhoenix.com), a Central European corporate finance company focused on mergers and acquisitions