We are in a business environment where an abundance of strategic buyers and financial sponsors exists, resulting in a constant wave of inbound calls, emails, and requested face-to-face visits to business owners from the buyer community. The proposition that these groups offer is they want to engage in direct, one-on-one conversations with business owners about an acquisition or investment. They are eager to avoid the presence of any other competition, or intermediaries, in those conversations. These seasoned buyers pitch such themes to owners as the following:
“We know your industry well and really want to acquire your business.”
“Whatever price we put into a Letter of Intent, we will close on that. We do not retrade.”
“Once you sign a Letter of Intent with us, we will close quickly.”
“You do not need to hire an investment banker or Mergers & Acquisitions advisor. We, as well as your attorney and accountant, can give you the help you need to close a transaction.”
The underlying, subtle theme that buyers are really saying to owners and executives is “Trust us. We are your friend.” The truth is that the buyer is not your friend but instead a business party that is focused on achieving two main objectives in an acquisition or investment:
Buying or investing in quality businesses
Purchasing at a valuation and structure that are most advantageous to the buyer
However, a reputable investment banking advisor, who operates with the intent of doing what is best for a client, can provide many advantages to the owner in a sale or capital raise process. For owners that are planning for a sale or capital raise, there are several key criteria they should contemplate when deciding if they should hire an investment banker versus engaging in direct conversations with a buyer.
Defining and Quantifying What an Investment Banker Delivers
A key question owners should ask themselves is how an investment banker financially benefits both their company and personal financial position in a sale. There are several value-added, measurable offerings that can be analyzed by an owner when weighing the pros versus cons of hiring an investment banker.
Measurable Investment Banker Offerings
A quality investment banker can pay for themselves, often multiple times over, by delivering additional transaction value to the owner in a sale process. In many transaction situations, a sound investment banker can easily push the buyer to pay additional purchase price that covers the advisor’s fees and expenses. Any amounts above that bar can be considered found money when compared against an unsolicited offer. For more insights on unsolicited offers, refer to the BG Insights article, How should owners respond to unsolicited offers?
An investment banking-led competitive process ensures that the company has vetted the market of buyer and / or capital options. If this process is managed in the most thorough fashion, then an owner can know with confidence that they have pushed the market as far as possible for optimal transaction terms.
Investment bankers can push buyers for more seller-favorable deal structures, which can heavily benefit the sellers and their walking away money proceeds. For more insights on deal structures, refer to the BG Insights article, Structure: The Backbone of a Mergers & Acquisitions Transaction.
An experienced and vigilant investment banker can serve as an insurance policy in a process to a company for sale. This means that the certainty to close is higher and maintaining agreed upon terms is more likely. Should a buyer attempt to retrade in price and / or terms, then that buyer can be exited from the process and another buyer, who is willing to pay a more aggressive value, can be engaged.
The investment banker can help reduce time commitments by the executive team by managing the sale process, vetting the buyers, managing buyer-seller conversations and due diligence requirements as well as making this an arm’s length transaction. By also increasing the certainty to close, the investment banker can help see the process to the finish line, further protecting management and shareholder time.
When selecting an investment bank, a shareholder group should work to understand how the investment banker can deliver value and the ways the advisor can demonstrate a positive impact on the above areas.
Defining The Services an Investment Banker Offers
There are many phases, milestones, and deliverables that an investment banker’s services can be broken into. When a business owner is interviewing an investment banker, it is important to request the advisor to provide details on these services. For the sake of simplifying for this piece, we have broken an investment banker’s services down into three core areas:
Information: Investment bankers provide a wide range of critical market and industry insights, buyer data, and financial data that may be beyond the reach of most business owners. An experienced and organized investment banker will be able to provide significant and value-added information to clients through all phases of a process. Most of this intelligence is proprietary and cannot be found through a google search or procured from an inexperienced advisor.
Advice: Strategic and deliberate guidance is at the heart of what investment bankers offer to their clients. The advisor must earn the client’s trust and understand the goals and objectives of the shareholders. Their counsel extends beyond financial aspects, encompassing purchase agreement discussions, networking capital negotiations, pre-close integration efforts, potential internal seller conflicts, and more. An objective and aggressive investment banking advisor can provide thoughtful suggestions to help achieve the client’s objectives in a sale or capital raise.
Options: Perhaps one of the most significant contributions of investment bankers is their ability to create a competitive environment and choices for the benefit of the shareholders. The advisor delivers a pool of quality buyer options to the table, thus igniting competition. This offers shareholders a position of strength and the ability to obtain maximum value, optimal structure, and find the party that is the best fit for the business as a whole. In short, an investment banker’s process helps to ensure that no money is left on the table.
Takeaways
In conclusion, deciding whether to hire an investment banker is not solely a matter of cost but rather a question of value. Business owners should recognize that quality, industry-focused investment bankers can bring an irreplaceable combination of expertise, trust, and the ability to create competitive options.
While some owners may consider navigating the sale process independently, the track record of investment bankers, who have demonstrated experience and industry specialization in securing higher valuations and more seller-favorable structures for their clients, speaks volumes. It is recommended that an owner analyzes both the tangible and intangible benefits that an investment banker can deliver in a sale process. An experienced investment banker will be able to provide you with the necessary information to complete that analysis on an advisor’s value-add.
