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 don’t have existing relationships. A question I often get is, “How do I pick a banker?”
Having answered this question several times, here are the highlights of how I counsel owners. These thoughts are targeting privately-owned businesses under $500M in revenue. Larger companies have different needs and are serviced by different competitors.
What makes a good corporate investment banker? Below are six factors to consider when hiring an investment banker for your company.
The most important issue is personal fit and chemistry. You are going to spend a lot of time with these people, and often have intense 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. However, I have found that pre-deal education and goal setting are more important, along with the hand holding 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 it 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.
Experience suggests that 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 active and deep relationships with investors, not just 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, corporate investment bankers are salespeople; how well can they position and sell a unique product?
A historical concern for private company owners hiring an investment banker is that the senior bankers work hard to win the mandate, and once the bank is formally 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 at all times and 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 rather an education to sellers who may not know what questions to ask during the selection process.
The more junior people there are working the deal, the less comfortable I would be. This doesn’t really change the fees much, but it does change the level of experience advising the client, the duration of industry relationships and how decisions get made during the process.
Separate from how a bank staffs a deal is its 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 how you are prioritized.
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 the 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 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 that do three to six deals a year can’t afford to fail on any one deal. Large banks that 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 hiring an investment banker.
Finding the right banker for your deal is critical, and it is 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 in order to select one to represent your deal to buyers.
©All Rights Reserved. January, 2021. DailyDACTM, LLC d/b/a/ Financial PoiseTM
Bruce Werner is the Managing Director of Kona Advisors LLC and served as an outside director on private company boards for the last three decades. Kona Advisors LLC provides advisory services to the owners, investors and CEOs of private and family-owned businesses. With deep experience in governance, succession planning, finance, strategy and management issues, Kona…
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