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Berkonomics

Do you engage an investment banker?

Many CEOs have asked me if I felt an investment banker adds value if the buyer has already been identified.

Investment bankers sometimes slow the process by requiring a “deal book” to be prepared containing considerable information about a company to help a buyer.  Deal books are expensive to create.

Other investment bankers insist that the company create competition for a deal, even if the buyer has already submitted a letter of interest to the seller.    Competition opens the deal to more public access, slows the deal and could give competitors wind of an otherwise confidential process.  And yet, it is almost universally acknowledged that without competition for a deal, the price will be lower, sometimes much lower.

Advanced Berkonomics soft front cover-smallThen there is the question of fees.  For small deals, an investment banker will ask as much as ten percent, although the average is slightly above half that.  For larger deals, expect the fee to start at five percent and scale downward with size.  And expect the investment banker to ask for an advance against expenses of at least $20,000 or much more with larger deals, with any unexpended funds not to be refunded.  If a buyer is already in hand, many will work for far less in percentage fees, and even in advances, because much of their work is done at that point.

[Email readers, continue here…]  And there is the question of whether an investment banker has a personal agenda to get a deal done in minimum time, even if the proceeds to the seller are less than could have been expected.  Is there any conflict of interest?  Is this not a parallel to the question of a real estate agent who cares little about that last five or ten percent of the purchase price, if it would kill a deal or slow its close, since the agent’s  commission amount is only a fraction of that difference?

And finally, could not the corporate attorney do just as good a job of negotiating a great deal for the seller, and do it for hourly rates instead of a percent of the transaction?

My experience is that good investment bankers do add significant value to a deal in most cases, easily earning multiples of their fee by increasing competition, upping the price, and finding areas for extra value that the seller did not think of.   Good investment bankers work with your attorney to structure the deal, help the seller to see more of the value hidden in the candidate seller, and increase the sense of urgency to close the deal among all parties.

Perhaps most of all, a good investment banker will insulate the seller CEO against the anger and ire of the buyer during the process that always accompanies stressful negotiations or issues revolving around the seller CEO’s continuing employment contract.  Imagine you’re fighting with the buyer CEO about your expected salary and benefits during a transition period to follow, expecting to work harmoniously with that CEO after all the tension and conflicts during the negotiation of the deal.  And imagine having that buffer in the form of the investment banker arguing on your behalf while you sit silently, giving up little or no good will during the maelstrom around you.  Presented with these mental pictures and the recommendations from so many of us that have done deals with and without investment bankers, you may lean toward interviewing a group of your industry’s best for the size of your deal, and being convinced that creating such a team is a good investment.

  • Cricket Lee

    OK there you go again reading my mind! timely and fabulous information!

    Cricket

  • Matt

    You miss the key point, where is the corporate development team in all this? An experienced Corp Dev and Strategy leader will be able to handle this internally, drive the negotiations and get the deal done at an appropriate price.

    Matt

  • Dave,
    A number of very good points. Twice I was a part of the executive team that took a company to an exit (each exit was in the $40-80M range). The first time a member of the board & the CEO negotiated a deal and arguably left $40-80M on the table. The second deal the investment banker squeezed out another $10-15M beyond what anyone thought the business was worth. I think you know which one sold at the higher price. Hire an investment banker, don’t be the fool who negotiates his own deal.
    Best regards,
    David

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