Most owners know they probably need help to get the best result when selling their business, and that means hiring an investment banker. But most owners don’t have experience with bankers, so they are not sure what to do. A question I often get is “How do I pick a banker?”
Having answered this question many times, here are the highlights of how I typically respond. These thoughts are targeting privately-owned businesses under $500M in revenue, larger companies have different needs and are serviced by different competitors.
The most important issue is personal fit and chemistry. You are going to spend a lot of time with your investment banker, and often in tense discussions, so you need to be comfortable talking to them about tough issues. In business school I was told about the “Airplane Test” – If you don’t want to fly from Boston to San Francisco sitting next to this person, why would you hire them to sell your business?
You can assume that if a bank has been in business for at least five years, they can reliably execute deals, otherwise they would not be in business. Most clients tend to worry about execution since they do not understand it, but I have found that pre-deal education and goal setting are more important, along with the handholding often needed during execution. If you don’t get the first two right, it is more likely to be a poor process. The latter depends on the client’s personality but is critical to managing the process.
To the extent that the owner, and the board of directors, can state specific goals and reasons for a transaction, and desirable terms, it will be easier to find the right banker. As the owner, you want to hear the competing banks provide feedback on how the market will view your business, your proposed transaction, and how they will pitch your story to investors. You should then consider how their pitch is aligned with your goals and constraints.
Most investment bankers position themselves either as generalists or as industry-focused specialists. Both approaches can work, but you should favor one and have a reason why. I have heard the small shops without industry experience say industry expertise and relationships don’t matter, while the large shops, which are typically segmented by industry, use their sector knowledge and relationships as their calling card.
It used to be that finding the buyside decision makers was hard, but Google solved that problem long ago. A good banker can demonstrate that they have active and deep relationships with investors, not just that they have a list of names that sound interesting.
Industry experience is important in developing the positioning and storyline of the seller. What is going to resonate with investors? At the end of the day, bankers are salespeople. How well can they position and sell a unique product?
A historical concern for private company owners is that the senior investment banker works hard to win the mandate, and once the bank is engaged, the deal is passed to the junior staff, or the “B” team is doing the work.
The better processes I have seen always have two Managing Directors on a deal, and a Managing Director is on every call. The larger the bank, the less likely this is to happen, due to how they manage their business. This is not meant as a criticism, but an education to sellers of what to consider.
The more junior people there are working the deal, the less comfortable I would be. This doesn’t change the fees much, but it does change the level of experience advising the client, the duration of industry relationships being brought to bear, and how decisions get made during the process.
Separate from how a bank staffs a deal, is their capacity to serve. Many of these people will work on multiple deals at the same time, so how does that impact you? Will you have to wait until the analysts are available to write your materials? While it would be a bit unreasonable to expect the team to be dedicated to only your deal, you need to know what priority you have been given.
Banks have business strategies that target specific market sectors; your goal is to find the bank where your business is in the bullseye of their strategy, not the outer rings of their dartboard.
Banks differentiate themselves by the minimum fee they charge per deal. Minimum fees of $500,000 to $1,000,000 are common at the low end, with more than $2M, and increasing, becoming the norm in deals over $10M EBITDA. When you are below or close to the minimum fee amount, it is more likely to be a bad experience. As deals get smaller, bankers move from being interested, to being indifferent, to not being motivated. I suggest you pick a bank where your likely fee keeps them motivated.
Smaller shops, which do only a few deals a year, can’t afford to fail on any one deal. Large banks, which do hundreds of deals per year, don’t suffer if they ruin your deal, but it can hurt you forever.
Larger companies, and certainly public companies, have different needs and more leverage when selecting an investment bank.
While fit, education, industry experience, staffing, capacity, and fees are the key topics, it helps to have a specific list of questions to flush out these matters. Consider this list a good starting point for creating your own interview questionnaire:
Finding the right banker for your deal is critical, and not a process to be rushed. Just as you want the banker to create a market of motivated buyers for your deal, you need to create a market of motivated bankers to select one to represent your deal to buyers.
We think you’ll also like:
[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):
This is an updated version of an article originally published on January 25, 2021.]
©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Bruce Werner is the Managing Director of Kona Advisors LLC, which provides advisory services to owners and investors of private and family-owned companies. With exceptional experience in finance, strategy, M&A, governance, and succession planning, Kona Advisors creates practical solutions to the most challenging corporate problems. Mr. Werner is an experienced Corporate Director, leading businesses through…
Please log in again. The login page will open in a new tab. After logging in you can close it and return to this page.