It takes an excellent team of advisors to generate maximum value on
the sale of your company. Most important is your investment banker.
How do you select the best one for you?
Selecting an investment banker.
There are literally thousands of investment banking firms. There are international giants such as Goldman Sachs and Merrill Lynch and focused boutiques such as Legacy Partners and Edgeview Partners.
There are regional niche firms and global players. There are firms that won’t work on a deal that is less than $100 million and firms that specialize only in “forest product” deals. The entire landscape is available to you. In addition to industry and size, some firms also specialize in selling family-held companies. There are also several steps you should follow to find “your banker.”
Do your homework and find the right fit.
The first step is research. The Web has made this relatively easy for you to identify firms that fit your needs. The primary specifics that you are looking for:
- Deals in Your Size Range.
You want to be an important client, not a rounding error.
- Significant Experience and a Track Record in Your Industry.
Industry knowledge matters. You can normally search records to see which advisors complete deals in your industry. It’s important because it means they know all the players, their interests and their quirks.
- Deep Partner Experience.
Sheer deal experience over many years matters greatly in this world.
Deal making is complex and takes many turns. Knowing how to read a bluff or spot a real buyer, or knowing how hard to push a buyer are all matters of feel, born out of experience.
Hold a “beauty contest.”
Once you have identified five to ten firms that meet your criteria, you or a trusted advisor should contact them and describe your goals.
Some bankers will be too busy on other projects to work on your deal.
(Sadly, some won’t ever take the time to return your calls.) But if you start with a list of ten credible firms, you will surely get three or four who will want to advise you. They have been through this drill a million times and will be prepared to come to you to make a presentation on their skills and ideas. This is called “the beauty contest,” where all of these Hermes-clad rich folk come and beg you for the chance to help you realize your dreams. This part is fun! Enjoy it while it lasts.
After a preliminary round of high-level discussions on your goals (majority/ minority sale, potential price range, rough ideas of financial performance), you will need to share detailed information on your company with the bankers on a confidential basis. This prepares them to give you the best possible advice, which is what you are looking for. It is a normal process: You send them a simple Confidentiality Agreement (“CA” in banker-speak).
Send them the data.
Once the bankers execute the CA, it gives you cursory protection.
Then, you send them several key items (which you have long since prepared as you have been thinking ahead!):
- Three years of audited, historical financials.
- Two years of future financial projections.
- A detailed business plan if you have it, or a strong three- to five- page executive summary of the plan.
- Product descriptions and product literature.
- A discussion of your primary competitors.
- A list of “investment considerations” or primary selling points (a list of the positive points that make your company unique). This would include your market share, product excellence, key management bios, and major plans for future growth.
Listen to the pitches.
Using this data, the bankers will be able to make a meaningful and detailed presentation on your options. Some business owners are paranoid about data floating around and so they prefer to spoon-feed their bankers. Avoid this at all costs if you can. Good bankers are used to working with highly sensitive data and treat it as such. If you give them very little to process, you will get a lightweight and pretty useless presentation. Remember, garbage in, garbage out. If you want a useful pitch, give them good data. If you have provided enough information, some pitches will be absolutely terrific.
The pitch will be composed of a lot of boilerplate stuff, like the pages describing how super the bank is and a laundry list of their historic deals. Push them to identify their specific skills in your sector and find out whether the folks sitting in that room worked on the relevant deals. You will smell real experience very quickly. But after this appetizer, the meat of any good pitch can be very illuminating. The two main portions are “valuation” and “sales process.” The first is essential, of course: It is their view of what your company is worth based upon their analysis of your financials.
This should be detailed and thoughtful. They should know, for example, exactly what multiples of EBIT or EBITDA companies like yours have sold for. From this data, they will give you a range of values for your business. They will say, “to us, all of this means your company will sell from 6 to 8 times EBITDA for a total consideration range of X to Y.”
Don’t just have your head turned by very high valuations. Check the work. Do a smell test yourself. Some bankers do dangle very high selling ranges just to prompt you to give them the mandate. They can be like overzealous real estate brokers, telling you that you can get two times market values just to get your house listed with them. Then you list it for that price and (surprise!) there are no buyers.
You’ve wasted a lot of time and hurt your asset. Be careful and prudent. Don’t believe your own press clippings! And if it seems too good to be true, it probably is.
The next most important section of the pitch is a detailed analysis of the prospective buyers by name. There should be thoughtful lists of industry buyers as well as prospective financial buyers. And I stress thoughtful for a reason. These people are smart, and the list of ideas should be smart. If you have a $50 million company, they shouldn’t list KKR as a potential buyer. The time and thought applied to this list are telling.
There will be other boilerplate items on the actual nuts and bolts of the sale and the team that will be on your deal. This latter point is essential. It must be spelled out exactly who will be on your team and who the team leader will be.
If you have a fancy, high-powered partner at your pitch but he’s not going to lead your deal, this is pretty worthless.
You don’t want the most important transaction of your life relegated to some third-year associate. You need a committed, experienced partner to run your deal. If they can’t commit to that, they’re not your bank.
Another reason to know the faces is that chemistry with the lead banker, in particular, is very important. You will spend months with this person, and many stressful hours, working on your most important transaction. You must trust them implicitly and envision yourself spending lots of time with them in a positive way.
The Covert Banking Freebie
Investment bankers are not known for giving away anything. The “sell your company” pitch by the investment bank is the only terrific freebie you will ever be given. At the same time you are evaluating the bankers, you are getting views of your firm and deal from many different angles. Your goal should be to have at least three potential bankers come and give you their detailed pitch. These pitches are normally 40-50 pages and are mostly very thoughtful and chock-full of information. And every pitch will be different, so by reviewing all three you will be able to synthesize the best parts of each into a terrific whole. You will have learned a ton about your merger and acquisition market from many massively compensated professionals and it will cost you nothing but a bit of your time.
It’s great!
Structuring the Deal with the Bankers
Of course, then the meter starts running. One item that will not be in their pitch is their fee structure. Don’t be coy, but just ask them what their fees are. There’s normally a retainer (around $50,000 for out-of-pocket expenses), a minimum fee (all over the map — $200,000 to $2 million for the big guys) which can be offset by a percentage fee (1 percent to 2 percent). Also, be sure to ask them if they have room on their dance card to work on your deal when it needs to be done.
If these pitches go well from your perspective (and theirs), you should ask all the bankers to send you their engagement letter right away, so you can see the details. It lists their fees and many key facets of their engagement. There is a pretty traditional structure to these so they are unlikely to vary widely. Your goal here, of course, is to get the best bankers at the best price. Strong, busy firms are unlikely to cut their fees very much, but they will not respect you—or you yourself—if you don’t give it a try. The best case is to have three firms want your business so you can play them off against one another. Go back to each with your requests: lower upfront retainers, lower total fees, lower minimum fees, and shorter tails (this last is the part that obligates you to pay them for a year or 18 months if any of these buyers do a deal. It is standard and fair, but can be negotiated.)
One way to potentially get a better deal for yourself is to ask them to shift fees to a greater success basis. For example, give them an initial fee at the low range and a higher fee as a reward for success. This can be highly motivating and powerfully align goals.
For example, they might say they can sell your business for $50 to $60 million and they want a 1.5 percent fee. Suggest that you will pay them 1 percent below $50 million, 1.25 percent from $50 $65 million, and 2 percent above $65 million. This puts your fees in their range but gets them a big home run if they knock it out of the park. On all of these, they may say no, but it will never hurt to ask.
Now that you have an ace banker on your team, you will hopefully be able to maximize value, close your deal, buy the boat you’ve always wanted and sail off into a nice sunset.
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