Using Investment Bankers to Sell Your Company
James Geshwiler, Managing Director, CommonAngels
Your company has grown – maybe even has become a branded name. You begin to smell success. Now it’s time to exit. You’ve had a couple offers along the way. And while the offers could be higher, they certainly are good enough. Or are they?
Some suggest retaining an investment banker, a broker who gets paid a percentage of the transaction, to help you sell the business. However, never before have you hired an investment banker and other entrepreneurs complain that they did not receive any value from their banker or felt they gave up a percentage of the sale for little or no gain.
Following are a few guidelines to help you reap the greatest rewards from a partnership with an investment banker.
Investment bankers are human. There are good ones and bad ones. Good ones can make mistakes; bad ones can get lucky. They will be your business partner in seeking a sale, but remember they also have their own business incentives for you to consider.
You are the CEO of your deal team. Good bankers bring transactional expertise, market information, and the ability to coordinate a sales process. However, they can never match your entrepreneurial passion and specific business expertise.
Hire a banker, and work actively with them to facilitate the sale. Don’t just sit back. If something doesn’t make sense, ask questions and challenge assumptions being made about your business. Sometimes the best bankers are invisible to potential buyers and simply guide the entrepreneur in the background to a successful exit.
Treat them as a key hire. Examine their background; do they know you are the business? Do they have experience in this industry? Are they trusted and respected in your sector?
Ask for and check references; their reputation will be known in the community. Inquire with other investment bankers who, of those identified, would not be a fit with your company.
If you have the good fortune to be involved in more than one deal, examine your banker’s qualifications each time. The banker who is right for one deal may not be right for another. In the end, this is someone with whom you will work closely and trust throughout the sale process.
Read the engagement letter. This is a contract between you and the banker. It not only contains how much they get paid but also the scope and duration of the agreement.
Consider what happens if you actually find the buyer, if the banker quits or doesn’t do much, or if you want to terminate the relationship. Some engagements last only twelve months; others several years. Engage a lawyer with experience in mergers and acquisitions not only to review this contract but to be involved throughout the process.
Many sales never happen. Just because your business is for sale doesn’t mean there will be a sale, so consider the consequences to the business in the process. To whom will a banker show your company? How much time will you personally invest in the process? How will the business perform while your attention is diverted to selling it? What will other companies – suppliers, buyers, partners, competitors – and employees think once they know the business is for sale? And what if they discover it did not sell?
Look at compensation. Calculate how much a banker will make on the sale of your business. Is the compensation material to them? The principals at many of the larger firms have an annual revenue target of $10 million, $20 million, or more. Small firms may have only a few hundred thousand dollars of revenue per year.
If your transaction will only generate a small fraction (or a very large percentage) of their target, ask yourself why they want you as a client. Are you too small to get more than the attention of their most junior staff? Are you so big that they lack the resources to adequately support your deal, or are they going to take too much risk themselves to make your deal happen?
Big and small. Think about how the size of the deal aligns with the banker’s own business model. If your deal is small, is the banker just using you to make a sales call on a larger client, “Hi, I’ve got this great high-tech company that is strategic to your business; it’s only $20 million; oh, and, by the way, can we talk about that $300 million equity offering?”
Alternatively, are you the deal that the banker hopes will turn their small business into a headline company? If so, will they over-shop the company, try to auction the company too aggressively, and take on too much risk for you that could cause long-term damage if a sale fails to materialize?
Generalists vs. industry specialists. This is an eternal question. Your company is a single transaction; it’s all or nothing. For the banker, your company is one of a series of deals, many perhaps with the same acquirers.
For example, a banker might have a practice of selling numerous businesses to a small set of acquirers. The good news is that they know the sector intimately and what it takes to close a deal. The bad news is that they might be more motivated to do many bargain deals with the same purchasers rather than trying to maximize the return on any single one.
A generalist cannot get too cozy with the players in the sector. However, they cannot know them as well as the specialist either. Ask a lot of questions, think hard, and choose wisely.
Technical Skills. Beware of M&A bankers that grew up as IPO bankers. Make sure your banker has played a substantive role in the deals on which they’ve worked. When you look at a banker’s skill set – building buyer demand, understanding your industry, deal structure skills, valuation skills, accounting skills, finance skills, tax skills, negotiating acumen – make sure you’re hiring someone that has everything you need.
Trust. At a certain point in a sales process, you will need to rely on your banker’s advice. Hire someone who will put your interests on par with theirs, and use the sale process to learn more about the banker’s reliability, attitude towards risk, and basis for making recommendations to you. When you get to a deal point with risk or ambiguity, you need to be decisive and correctly act on (or interpret) your banker’s advice.
© 2006 James Geshwiler. All rights reserved.