Investment Bankers: No, We're Not Villains
Investment bankers are often portrayed as villains, when really we are value maximizers.
One of the most common criticisms against investment bankers is the accusation that our only motivation is to get a deal done at all costs. Well, let me start out by making one thing perfectly clear: those accusations are right on the money! But what you might be surprised to learn is that this isn't such a bad thing. In fact, it's often exactly why business owners hire us in the first place. Here are my views on three key roles that investment bankers must play in a sell-side transaction.
I'm an investment banker. People hire me to sell their business at the best price on the best terms. That's why investment bankers are paid on a Lehman Scale or some other success fee structure. We are compensated according to the objectives of getting a deal done at the highest price on the best terms. The higher the purchase price, the larger our fees. So yes, we're definitely out to make money; but that isn't a bad thing, because so is the seller. That means that our interests in the deal are perfectly aligned.
All of my engagements have a clear understanding of a minimum purchase price at which my clients will pull the trigger on a deal. If I don't think I can achieve this minimum, I don't work with that client. Why? Because I'll never get paid. To me, any price over and above that minimum value is success, and my clients have agreed to this at the onset of the engagement. Just as Pavlov's dogs salivate when you ring the bell, good investment bankers are conditioned to push hard to close deals when there is an offer that exceeds the minimum threshold. What we're doing is working to meet an objective we both agreed was acceptable up front. That's our job.
If the highest price is not your primary objective when selling your business, a competitive auction process may not best for you. Say, for example, you would rather find one strategic buyer or private equity partner that provides the best fit for your company. In that case, you should consider hiring an advisory firm, paid on a hourly basis, to research acquirers that meet your criteria. Approach those prospective buyers in a negotiated sale to achieve your alternative objectives of best fit.
What I'm getting at is that sellers should aim to match the compensation structure with the results they want to achieve. So, if your goals on a sale are anything other than best price on the best terms, don't bother contacting me. I'm an investment banker; maximizing value is what I do!
The definition of rational is having reason or understanding. Top investment bankers strategically remove all trace of emotion from their psyches when it comes to making a deal. Yup, only ice water runs through our veins. If comparable transaction values show 4.0X EV/EBITDA for your industry and you get a offer for 4.1X, taking the deal is the most logical thing to do. That's why a professional investment banker won't ask you if the deal feels right or if it fits your long-term vision for the company. Those things may be important to sellers, but they're not why we are hired.
I'm not suggesting owners who are selling their businesses don't need to consider some or all of these softer issues. But if you're looking for coddling, you're unlikely to get it from me — or any other good investment banker, for that matter.
When you try to picture the best possible investment banker ever, think of Spock, except in a three piece suit — preferably Armani.
The golden rule for an investment banker in my books is to pick a side and fight like hell to maximize value while employing rationality. I sometimes hear of intermediaries playing the middle man between buyers and sellers. That's not how it works in my world. I know exactly who is paying my fees; it is either the buyer or the seller — never both. There is no in between. There are no shades of gray. There is no sitting on the fence.
This rule provides me with clarity on my role, and it establishes guidelines on how I win or lose. It's tempting for investment bankers and business brokers to play matchmaker, but this is doing a disservice to the business owner looking to maximize value. If your goal is to get the highest price, don't agree to pay a success fee to someone for just making an introduction to a potential buyer. And if you offer to pay them on a hourly basis, you'll probably see them run away.
Investment bankers take a side, but that does not mean that they become an obstacle to getting a deal done. It just prevents people from questioning their motives because they are out in the open. This creates the transparency and communication needed to close deals. Everyone wants to feel like they negotiated a hard but fair deal. In the end, I believe that is a win-win situation for both sides.
The Bottom Line on Investment Bankers
Investment bankers are often portrayed as villains, but we're really value maximizers. We are not cold-blooded, money-hungry leaches trying to close deals at all costs. We are rational advocates seeking the best price on the best terms — and do whatever it takes to close a deal. When you think about it, that isn't such a bad thing. After all, isn't it why you hire an investment banker in the first place?