How To Pick an Investment Banker

A question I often get asked by business owners is how to pick an investment banker.

Most owners understand that hiring an investment banker can help them get the best result in selling their business, but many don’t have experience with bankers and are unsure what to do.

Having answered this question many times, I have outlined the highlights of my typical response in the key considerations listed below.

If you own a private business with less than $500 million in revenue, then these considerations are specifically for you. Larger companies have different needs and are serviced by different competitors.

Fit and Chemistry

The most important issue in deciding who to hire is personal fit and chemistry. You will spend a lot of time with your investment banker and often carry out tense discussions with them. As such, it’s crucial that you feel comfortable talking to them about tough issues. One way to check if you can do this is 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?

Pre-deal Education vs. Execution

Clients tend to worry more about deal execution as they do not understand it. In my view, if a bank has been in business for at least five years, you can assume that they can reliably execute deals, as otherwise they would not be in business. I have found that pre-deal education and goal setting are more important factors to assess in a banker, along with the handholding often needed during execution. If you don’t get the first two right, it will more likely be a poor process. The latter depends on the client’s personality but is critical to managing the process.

Finding the right banker here becomes easier the more an owner and board of directors can state their specific goals and reasons for a transaction, as well as their desired terms. As the owner, you want to hear 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 aligns with your goals and constraints, and decide who to hire from there.

Industry Experience

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 that small shops without industry experience claim that industry expertise and relationships don’t matter. On the other hand, the large shops, which are typically segmented by industry, use their sector knowledge and relationships as their calling card.

Finding the buy-side decision-makers used to be difficult, but Google solved that problem long ago. A good banker can demonstrate that they have active and deep relationships with investors, not just a list of interesting names.

Industry experience is important in developing the positioning and storyline of the seller. Does the banker understand what will resonate with investors? At the end of the day, bankers are salespeople. How well can they position and sell a unique product?

Staffing

A historical concern for private company owners is that the senior investment banker works hard to win the mandate, but once they are engaged, the deal is passed to the junior staff or B team, who actually do the work.

The better processes I have seen always have two Managing Directors on a deal and a Managing Director on every call. The larger the bank, the less likely this will happen, given how they manage their business. This is not meant as a criticism, but simply to educate sellers on what to expect.

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 are made during the process.

Capacity

Separate from how a bank staffs a deal is their capacity to serve. Many of these people will work on multiple deals at any time. How does that impact you? Will you have to wait until the analysts are available to write your materials? While expecting the team to be solely dedicated to your deal is a little unreasonable, you need to know what priority you will be given.

Fees

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, and not on 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. Fees over $2 million and counting are becoming the norm in deals over $10 million EBITDA.

When you are below or close to the minimum fee amount, you are more likely to have a poor experience with your banker. 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 will keep them motivated.

Smaller shops will do only a few deals a year. As such, they can’t afford to fail on any one deal. Large banks will do hundreds of deals per year. They may not suffer if they ruin your deal, but it can hurt you forever.

This is an important consideration, specifically if you own a smaller company. Larger companies, and certainly public companies, have different needs and more leverage when selecting an investment bank.

Preparing for the Interview

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 using this list as a good starting point for creating your own interview questionnaire:

Investment Banker Due Diligence Questions

1. Can you provide the history of your firm?
2. How long has your team been working together?
3. How do you staff the assignment?
4. Are there 2 MDs on the assignment at all times?
5. Do you have the capacity to take on the work?
6. Do you have an industry focus, and how does it align with the client?
7. Can you provide examples of work you have done in the industry?
8. Do you have any unique specialties?
9. What size deals do you work on? Are they small, medium, or large?
10. Can you describe your ideal client?
11. Outline the process you would use for this situation.
12. How would you market this asset?
13. How would you value this asset?
14. Can you describe the relationships you have that would be interested in this asset? Are they strategic or financial?
15. Do you recommend a broad or narrow auction, or something more targeted?
16. How will you develop the story?
17. What is your financial modeling process?
18. What is the timeline of your process, and how long will it take?
19. Can you talk about current market conditions and how they influence the process?
20. What are the likely risks to closing?
21. What is your fee structure?
22. Do you have a minimum fee, and if so, what is it?
23. What appeals to you about this situation?
24. What concerns do you have about this situation?

The Right Match Is Crucial

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 also need to create a market of motivated bankers eager to represent your deal to buyers. Selecting the right investment banker from a pool of choices is an important first step to securing the best possible value for your business.

We think you’ll also like:

1. ‘Housekeeping’ Tips To Consider To Maximize Business Value Before You Sell
2. Business Valuation Is More Art Than Science
3. Banker, Broker or Sell it Yourself: Choosing the Right Method to Sell Your Company

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. How To Sell A Business A Step By Step Guide
2. Insurance For The Business Owner 101
3. What’s it Worth? Valuing a Business for Sale

This article was originally published on December 15, 2022.]

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