For most business owners, finding a new partner for the business can involve some very unique challenges. Those challenges can become magnified when searching for an investment bank that will be best suited for your specific transaction. Achieving a superior outcome in any liquidity event — whether a full sale, a debt recapitalization or a minority investment — demands proactive planning and strategic thinking. That can make many investment banks, which tend to focus on near-term change-of-control transactions, a poor fit for private companies in need of strategic guidance.
Though many business owners interact with investment banks and “business brokers” on a somewhat frequent basis, hiring an investment bank can be a once-in-a-lifetime decision for private business owners contemplating a transaction that can represent the summation of a life’s work. We asked a handful of successful business owners to share what they wish they had known when they first hired an investment banker. We encourage you to consider how their advice may apply to your situation.
Can I Do This Alone?
The biggest hurdle for many clients when selling their business is often the very first one — they’re not sure they need an investment banker to help with a transaction.
We’ve worked with plenty of private company owners who tried a do-it-yourself approach to corporate finance the first time around — only to find themselves and their management team mired in complex, contentious and time-consuming negotiations and distracted from running the business. They tell us there are six main reasons why it’s smart to hire an investment banker:
- Working with a banker in advance of a transaction can help clarify and prioritize shareholders’ objectives;
- Bankers can prepare management and the company to show their best for potential buyers;
- A transaction process that maximizes value while minimizing distractions for the company and its leadership is best accomplished with the assistance of an experienced banker;
- It’s important to have a banker act as a buffer between companies and potential investors or buyers and to maintain momentum toward a transaction;
- Bankers can create competition for the business or the perception that there is the threat of competition; and
- An experienced banker plays a crucial role when it comes time to negotiate, structure and close a transaction.
Time and again, we’ve seen that hiring a banker pays for itself, as companies that conduct efficient, well-planned transactions attract higher valuations, achieve better terms and have a higher certainty of closing. The work of a good banker can add many multiples of the banker’s fee to the final purchase price of a company. You likely know other company owners, some of whom have done transactions with and without bankers. Talk to them about what value the right banker can add to a liquidity transaction.
What Should I Demand?
You and your company deserve a solution that’s customized to your specific situation and goals, both economic and non-economic. Don’t let bankers apply a one-size-fits-all template to your transaction. Any banker worth hiring should ask good, probing questions from the start. They should fully understand your business and understand what you want to achieve from a transaction and offer multiple ways of getting there.
Customized Solution
The cookie-cutter solution rarely offers the right fit for a private company transaction, particularly in situations where unique ownership dynamics and non-economic goals are significant factors. Make sure you’re getting the customized attention you deserve from your investment banker. Let’s face it, liquidity events don’t just happen by themselves. Work with an advisor who is committed to giving you feedback necessary to create a customized solution that fits your priorities and the time and space to put that solution into action.
Track Record of Success
At the most fundamental level, an investment banker should be able to document a track record of proven success. But even more, we believe that to truly advise a client on what is likely the most important transaction of their professional career, it is essential to have been “in the driver’s seat.”
We frequently work with private owners who have previously tried to sell their company using other bankers. Those bankers may know the practice space in great detail or have a specific relationship with a likely buyer, but that can keep them from thinking about how a company can be marketed to the broadest possible range of buyers. For owners of mid-sized businesses, the greatest valuation premium sometimes comes from a buyer who sees how a company’s business model can be applied across industries and sectors. We believe that anyone providing advice must understand first-hand how to operate, build, scale and exit a business themselves.
Experienced Team Members
You should demand that they commit senior members of their firm to your transaction. In the best investment banks, senior officers don’t just exist to win business then hand off the engagement to a team of junior folks who execute the transaction. You want senior bankers that are involved in every step of a transaction, from pitching the business to planning the marketing strategy and writing a Confidential Information Memorandum to calling buyers, selecting an investor and negotiating the final contract.
Private owners should think about whether an investment bank’s strengths match up well with their company. Can the bankers understand and market around the unique value drivers and risks involved in your company’s sector? And, can they access the right capital provider or buyer, wherever that investor may be? These are very important considerations.
Assess whether a bank is willing to commit time and thought to your transaction at all levels of its organization. When senior bankers talk to you about your transaction, ask the questions necessary to understand whether they’re really digging into your business and understanding its dynamics.