Many CEOs have asked me if I felt an investment banker adds value if the buyer has already been identified.
How investment bankers behave
Investment bankers sometimes slow the process by requiring a cloud-based “data room” and “deal book” to be prepared
containing considerable information about a company to help a buyer. Deal books are expensive to create. If you have a data room already, all the better.
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.
Then 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.
An unexplained conflict of interest
[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?
How about the corporate attorney guiding a deal?
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?
In my experience, the answer is…
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.
Insulating the CEO and team as negotiations get tough
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.
Your next steps
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.
Value Add:
– proper positioning/story telling of the opportunity financially and operationally
– generate additional and perhaps better strategic acquisition options
– better strategic acquirer means more synergies, should translate to higher value
– additional options drive competition, driving increase in value
– banker fees structured as % of the incremental offer. The higher the incremental the higher the fee, so incentives are aligned and essentially sharing in upside
– process, negotiation, due diligence management. CEO spends considerably less time, which can be spent on upholding financial performance which is driving the desired valuation, and less prone to costly missteps
– consistent/realistic guidance and coaching from start to finish through a daunting, volatile process that can range from 3-6 months
Thank you for this article.
Really insightful and thoughtful
About 7 years ago, we were approached by one of the big three companies in our industry to sell our division to them. It was well known that this company paid the smallest multiple of revenues among the big three for their acquisitions, so we enlisted the most experiences investment banker in our industry. They identified 20 or so possible buyers and approached 6 or 7 that were thought to be the most likely targets, including the other two of the top three. They were able to come up with no competing offers so we ended up selling to the company that originally approached us for a small multiple. And we netted less money due to the significant investment banker fees. It turned out to be a real waste of money. I was not going with the sold division, so negotiating my compensation package was not an issue.
I think about what we could have done differently, not knowing when we entered the contract with the investment banker that they would not be able to generate competition. I wonder if we could have structured a deal with them that their fees were reduced, perhaps to zero, if they could not generate a competing offer.
Very good points Dave. As an entrepreneur who co-founded and sold 3 of my companies, and now a technology investment banker, I would like to highlight a couple of other key points. First, most sellers vastly underestimate the time and emotional stress of a selling process, often distracting the exec(s) from running their business. An effective investment banker can meaningfully reduce the time and stress and put more controls in the process. Second–and perhaps most importantly–an investment banker can help qualify the right buyer (even if it is a lower price) and keep them honest. The fact is today among professional buyers such as PE firms and strategic buyers, the process has become more complicated and many of these buyers are more likely (once they have secured the LOI) to pull (a lot of) shrewd moves, particularly at the zero hour. A powerful advisor can help mitigate (but certainly not eliminate) these issues. Also an investment banker can discern the key issues that could be dealbreakers for certain buyers and bring them up earlier to better run the process so late due diligence does not blow up a deal on something that should have been disclosed earlier. (In that case the seller is saddled with legal fees, emotional exhaustion and often anger/bitterness–this is highly emotional.
There are some great attorneys–but by the nature of their hourly fees and their training–positioned to understand the non-legal nuances of getting a deal done. Having said all that–NOT hiring a great attorney is a mistake–along with a trusted experience advisor/investment banker.
Net, net–most entrepreneurs I know who did not use an investment banker–whether the deal succeeded or not–lamented that they wish they had!