During the summer of 2016, I spent three days in New Orleans delivering half-day presentations about M&A to groups of business owners and executives. I didn’t want my presentations to sound self-serving, so I purposefully did not plan to talk about how to hire people like me. Guess what? The biggest question by far was, “How do I hire a good investment banker?”
What stood out to me were the misconceptions. Person after person believed knowing a lot of buyers, industry experience and some sort of otherworldly ability to get a high price were the key considerations when hiring an investment banker. I’ve discussed the third point in a previous article, so now let me address the other points.
Before I delve further into these issues, let me address a few misconceptions about M&A. The reality of buying and selling companies is this:
- Selling a company is relatively easy and straightforward
- Buying a company is very difficult
This is counter-intuitive for most of us. If you’ve ever sold a product or service, you’ve probably done what most sales people do…fantasize about making the buying decision. The buyer has the easy job, you console yourself as you put down the phone after learning you’ve come in second. Again. “One buyer and three or four potential sellers means 100% success for the buyer and only occasional success for the seller,” you later whine to the bartender. “I used to be in sales…it’s a tough racket.”
In M&A, roles are reversed. Buyers far outnumber sellers. Think of pushing a shopping cart down the aisle of a grocery store. You are looking at different cans of soup, trying to decide which can to pick. Buyers of companies often think they are pushing the cart, trying to decide which can to pick. This is incorrect. Business owners are the ones pushing the cart. Buyers are the product on the shelf.
On a weekly basis, I usually get contacted by 20 to 30 private equity firms. They all say the same thing: “Whaddya got?” In the M&A world, buyers far outnumber sellers. Demand outstrips supply. Finding a buyer is very easy. More accurately, finding a buyer interested in doing a deal is easy. You know what is difficult? Closing a deal that makes sense for the seller.
Let’s examine some common M&A misconceptions and compare and contrast them with what is actually important.
Misconception: Knowing a Lot of Buyers Is Important
While knowing a lot of buyers is not a negative by any measure, it isn’t as important as you might think. What does “knowing a lot of buyers” mean? Does that mean the investment banker is personal friends with all these buyers, attending social functions, backyard barbecues, holidays and dinner parties? If that’s the case, then whose interests would be represented? The new acquaintance (the client) or the cadre of old pals?
Perhaps “knowing a lot of buyers” means spending copious amounts of time researching and studying dozens of industries and hundreds, perhaps thousands of companies? Perhaps the investment banker also spends large amounts of time on the phone discussing their strategies? While these are not negatives by any stretch, this is not realistic for a simple reason: The day (or week or year) does not contain enough time to effectively stay in detailed communication with dozens or hundreds of companies.
A person, or a team of people, can effectively “stay in touch” with only a small handful of companies. What value is gained by working with an investment banker who only works with a small number of potential buyers? Why limit yourself?
This is not say that investment bankers do not have contact with buyers. Of course they do; that is a natural byproduct of selling a company. And while genuine friendships may undoubtedly exist between the occasional buyer and the occasional investment banker – and nothing is inherently wrong with those friendships – those friendships are outliers more than they are common.
Reality: How the Buyer’s List Is Put Together Is What’s Important
A typical question for investment bankers often is, “Tell me about your buyers.” This is a flawed question because investment bankers do not have different, unique, proprietary lists of buyers. Here’s the reality: Buyers are easy to find and easy to contact. So, instead of trying to determine which investment banker has the best buyer’s list, owners and executives should ask the following questions:
- How do you create a buyers list?
- How do you go about contacting those buyers?
The Research Database Matters
A capable investment banker will use Capital IQ, which, in my humble opinion, is the gold standard for research databases. I know that sounds like a plug. (Disclaimer: I am not a paid endorser nor am I affiliated with Capital IQ in any way, but I can tell you from firsthand experience it is indispensable when putting together a buyer’s list.)
Capital IQ does two very important tasks and does them without peer (in my opinion): First, it is exceptional at unwinding corporate trees, thus helping to determine who owns who. Second, the user can conduct research on an extremely granular level. Searching for companies based on SIC and NAICS codes, geography and an enormous array of other criteria.
In the hands of a skilled user, an investment banker will be able to create a buyer’s list that will be virtually identical to other investment banker’s lists. The days of having unique, propriety lists are long gone. The Internet is the great leveler. Well, that and the ability to afford an expensive database such as Capital IQ. If you are considering an investment bank that does not use Capital IQ, they probably don’t have the right resources to do a good job. Be wary.
Knowing How to Contact Companies Also Matters
Having a good list is one thing. Knowing how to contact companies is another thing. That said, most companies – and all private equity firms – are acquisitive and want to make acquisitions. They want to be contacted by companies for sale. Knowing what to say and how to find the right person are the imperative skills you need to determine when considering hiring an investment banker. And here are my techniques to do that.
The first step when trying to find the right person is to seek out the person with “corporate development” in the title. Corporate development means, “I buy companies.” This differs from a similar but totally different title of “business development,” which means, “I want to sell you something.” If the company doesn’t have a corporate development person, then the most likely targets will be the owner, the president/CEO or the CFO.
Having techniques for getting past screeners is also important. Numerous times over the years, when I’ve asked, “May I speak to the person who takes the first look at acquisition opportunities,” I’ve had the receptionist say, “We don’t do that sort of thing.” I deftly handle that comment by asking, “So, you’re the final decision maker for acquisition opportunities?” Then I shut up. I always get routed to the right person.
Navigating the really big companies (Fortune 500, in other words) is a different beast. Often, they will have a corporate development person listed in Capital IQ. Sometimes checking LinkedIn will yield a good result. But if a corporate development person can’t be found, the most likely suspect will be the CFO. However, the CFO isn’t going to take a cold call. So, here’s the workaround: Ask for the office of the CFO. That means you’ll be routed to the CFO’s assistant. Simply tell the assistant “I’m representing a company for sale and we think it could be a good fit with your company. Who on so-and- so’s staff takes the first look at acquisition opportunities?” You’ll be immediately routed to the right person.
This is the sort of nitty gritty detail you need to hear from your investment banker. Knowing people is nice, but that doesn’t automatically open doors in the M&A game. Knowing how to ask the right questions of the right people, that’s what will get those doors to open.
And if the investment banker continues to tout the great, proprietary list of buyers as their differentiator, ask to take a look. Specifically, ask to see the contact information. If you see a lot of general email address (e.g., “[email protected]” and “[email protected]"), be wary.
Instead of asking, “Tell me about your buyers,” business owners and executives are encouraged to have prospective investment bankers describe their process of creating a buyers list and how they go about contacting those buyers.
In Part 2 of this series, I will examine the importance of industry experience when considering which investment banker to hire.