The Role of an Investment BankerDepending on the nature of the engagement, an investment banker (sometimes called a business broker or an M&A advisor) may play a large or small role in a divestiture transaction. Regardless of the contractual expectations negotiated between an investment banker and their client, every investment banker brings value to a transaction by bringing expertise in the following key areas:
Determine Objectives of the SellersInvestment bankers, at the end of the day, are agents of their clients. A good investment banker will determine what you, as the seller of the business, wants, and use his or her expertise in the M&A industry to achieve that goal.
Determining the objectives of the sellers is arguably the most crucial step in creating a successful relationship between an investment banker and his or her client. This process involves sitting down with your investment banker and articulating your priorities and your expectations for the transaction. Your investment banker should have your best interests in mind, and what this means is balancing maximizing value and managing expectations.
Manage ExpectationsAn investment bank delivers value by managing the expectations of their clients during sales processes. An experienced investment bank will know the current M&A market and will be able to discern where seller’s expectations are unreasonably above market norms. For example, if you are looking for 10x EBITDA in the sale of your business, and recent comparable transactions in your industry have only obtained 5x EBITDA, then you will likely end up forgoing good offers in search of an unlikely higher bidder. A good investment bank strikes the right balance between getting you the most value, while maintaining realistic expectations on what can be achieved in the sales process.
Advise on Business Valuation and Deal StructureM&A deals vary greatly in nature and structure. The size of the transaction, who your target bidders are, and whether or not you want a continued interest in the business after the sale, are just a few of the many factors that go into determining the best transaction structure for any particular deal. An experienced investment bank will be knowledgeable about attainable values and deal structures for a company.
Prior to marketing a business for sale, an investment bank will advise on an achievable business valuation and deal structure based on their experience as well comparable data from the market. These are essentially predictions on how much your business could reasonably sell for in the market, but help shape the priorities and expectations of the business seller through the process.
Engage in Value-Maximizing PreparationA good investment bank should be able to assist in identifying activities which your business can engage in to maximize its value to potential buyers. Such activities will almost always differ from business to business, and seek to target and improve weak points in a business. For example, if your business has an unusual amount of working capital, an investment bank may devise a strategy to decrease working capital levels that are more in line with market norms. In general, minimizing the factors that will impede salability will also increase the pool of potential buyers and, in turn, increase your chances of obtaining the best deal.
Prepare Marketing DocumentsOne area of expertise that investment banks will provide is in preparing marketing documents. Marketing documents include crucial documents to the sales process, such as financial projections and confidential information memorandum (CIM). Preparation of these documents is often one of the most time-consuming aspects of the sales process. These documents will be the first impression a potential bidder may get of your business so the investment banker has to succinctly present the opportunity. The CIM, especially, should contain relevant information, while at the same time be organized and concise.
Find Qualified BuyersAn investment banker’s value lies largely in the connections he or she may have in the M&A industry and their ability to find qualified buyers. An investment bank, from experience, should have a broader market knowledge than any one seller. Additionally, part of an investment banker’s job is knowing the market movements. Due to their industry knowledge, investment banks can often find potential bidders for your business that you originally did not think to seek. For example, a business in a completely different industry may be looking to acquire and expand into the market that your business is in. Without an investment bank that regularly keeps abreast of M&A market news, a seller may miss the opportunity to pitch to an appropriate buyer.
Negotiate the Best DealInvestment bankers are advocates for the best transaction valuation and structure. They maintain this role through all phases of the sales process including obtaining an LOI, dealing with due diligence, and negotiating the purchase and sale agreement.
Through the due diligence process, an investment banker will gather all necessary financial, legal and organizational documents. Additionally, they will scrutinize due diligence documents and anticipate any questions that a potential buyer may have. This is an important part in achieving a smooth and success sale.
During negotiations, an investment bank will identify aspects of the deal that are if conflict with the seller’s objectives, and will negotiate accordingly. Smart negotiating, as well as knowledge of standard contractual terms in the industry can help to determine which contract terms to push hard on, and which to compromise on. An investment banker also plays the middle man, acting as the "bad cop" in the deal while the seller and the potential can continue an amicable relationship during and after the transacation.
Facilitate Interaction between Other Deal ProfessionalsAs mentioned earlier, part of an investment banker’s value lies in the people they knows. This applies not only to potential buyers, but also to other advisors on your M&A team as well. Every M&A team should have a strong lawyer, a strong accountant, and other necessary professionals with expertise in their area.
A good investment bank should have a roster of reputable and quality professionals from whom you can pick one that suits you. The benefit of these relationships is that, as a repeat player, investment banks hold more bargaining power with these professionals as well as more knowledge regarding their reputation within the industry.