Choosing a qualified, experienced investment banker with relevant transaction experience to represent your company might be the most important decision to ensure a successful outcome. If you choose poorly, the downside is serious, as even well-meaning bankers can derail a deal with bad advice, poor judgment, or a misrepresentation of their skill-sets.
In this post, we cover 6 key themes business owners / CEOs should consider when choosing an M&A advisor, and what qualifies as a good answer from an advisor. These are critical in the process of how to choose an investment banker.
As a business owner, the decision to sell is one of the most important events for your company and for you personally. Identifying several M&A firms and then choosing the right one can be difficult and confusing, and you need to get it right given the downside of a failed sale.
You need to be confident that your advisor is going to be providing good guidance on how to present your company, to whom to market it, how to proceed with any negotiations, how to manage exclusive solicitations, etc. The structure of the transaction can also become complicated as we discussed in “10 Key Considerations Other Than The Purchase Price,” which means your advisor needs experience.
To make things more complicated, any M&A advisor you evaluate will be providing you statistics, fancy presentations, impressive backgrounds, and success stories designed to make them look like the best advisor for you. Sifting through all this information can be overwhelming. Here are the top 6 items to discuss with an advisor before hiring them.
Industry: What Comparable Transactions Have You Completed in the Past 4 to 5 Years?
Look for completed transactions in your industry. When we say “industry,” we mean as close to your “specific niche” as possible. An advisor who has done deals in “manufacturing” is not necessarily good enough — they should have experience doing deals specifically in your industry niche. Retaining an advisor who has recently completed transactions in your industry helps ensure that they have fresh industry contacts and more importantly, deeper insight into who is actively making acquisitions. They will also be familiar with industry terminology and dynamics which is valuable in preparing marketing materials. Additionally, aggressively use Google to verify all the information advisors provide by searching for press releases of transactions the advisors claim they have completed.
Size: What Size Transactions Have You Completed in My Industry?
Size is critical. An advisor who has sold two $600M companies to GE Plastics is not right for you if your company is one-tenth the size and is hoping to find a majority private equity partner instead of 100% sale to a strategic. Size is also important because it indicates who specifically from the advisory firm will be working day-to-day with your organization. Again, if the firm more often does $1 billion deals, and you run a company one-tenth the size, you’re likely not going to get the attention that you need from the senior professionals.
Broken Deals: Of the Engaged M&A Assignments in the Past 3 Years, How Many Did Not Close and Why?
This might be the most important question of all, particularly when your company is small to mid-sized. Have the advisor walk you through (on a no-names basis, if they insist) the recent transactions they have taken on that were not consummated. This is critical due diligence. Ask to speak with several of the business owners they have worked with. When you connect with the business owner, ask how hard the advisor worked, how long they stayed focused, and who were the individuals that really completed the work. If an advisor does not provide you several referrals, it’s a red flag and you should approach with caution.
Buyer Research: What Is Your Process for Developing a Comprehensive Buyer List?
With multi-billion dollar deals, the list of potential buyers is usually a very short list. For example, when Gillette decided to put itself up for sale, there were only a few buyers that make sense to approach (Procter & Gamble, Colgate Palmolive and several international multi-billion dollar personal products corporations).
Unfortunately, it’s not that simple when you’re a small or mid-sized private company. The reality is that there are many potential buyers and there is no chance that even the best advisory firms have every relationship needed to best ensure that the deal is closed properly. This means that the right advisor will have a process for researching, identifying, and contacting additional buyers. When selecting your investment banker, ask each one that you interview about the nitty-gritty details of their buyer research and buyer outreach process. They should have a very good answer for you, and it should include internet research, database research, contacting several specific industry experts they know, etc. Their research should culminate with a finished document that shows all the potential buyers that they intend to approach initially on your behalf.
TIP: When an advisor mentions a great relationship they have with XYZ company, and claims that XYZ Company is a high-potential buyer, always ask the follow-up question: “who do you know at XYZ firm?”.
It’s also important to ensure that the advisor has a good understanding of both strategic buyer and financial buyer possibilities. As we discussed in “5 Major Differences Between Strategic and Financial Buyers“, the two different buyer groups have fundamentally different goals, which usually affect the deal terms as well as the post-transaction dynamics. If it’s a financial buyer, you often can continue running the day-to-day operations of the company after the sale. On the other hand, a strategic buyer will usually look to take control and you/your team will either step aside or have to fit within their organization.
Valuation: What Range of Valuations Is Reasonable to Expect? Why?
Valuation is one of the largest concerns for a business owner. After years of work building a company, it’s important to know your business is being fairly valued.
The advisor should have a good feel for current market conditions and thus be able to provide guidance on their valuation expectations. Qualified advisors know that the price of any business is dictated by its future strategic value to the buyer(s) who is (are) interested in the business. This means that an advisor can not give you total certainty until you actually go down the road and have final bidding bids from buyers.
In fairness to advisors, it is important to go into an M&A process with reasonable expectations about your company’s value. Remember that market conditions can weigh heavily on the outcome. If you purchased a home in 2001 and sold it in 2006, you likely made a handsome profit. If you purchased a home in 2005 and had to sell it in 2009, you likely lost money. Exogenous market conditions have important effects on price, no matter how good or bad your business is.
TIP: Compare the valuation expectations you hear from the different advisors you choose to interview. If there is significant variation among the advisors, drill down on their respective valuation estimates so you can understand what is specifically driving the differences. This might really help indicate which firms know what they’re doing.
Process: Please explain who from your team will be doing what for my company?
A typical sale process takes 6 to 9 months and qualified advisors will have reasonably similar stages: Business Review; Preparation of Marketing Materials; Launch; Buyer Due Diligence/Initial Offers; Meetings; Negotiations; and Closing. A key question to ask is: Who will be actually contacting the potential buyers? Is it going to be the senior member of the advisory team who has developed an understanding of your business, or is it going to be a junior person on their team working on multiple deals?
Depending on the size of your potential buyer universe, it is reasonable for the advisor to enlist the help of junior people at their firm to call on lower-probability potential buyers, but the answer you’re looking for is that the senior banker will be handling as much of the outreach as possible to key potential buyers.
Your Takeaway: How to Choose an Investment Banker
A sale process is going to have ups-and-downs and there are going to be challenges. Buyers are going to ask difficult questions, potentially disagree with your views of the market, and challenge your assumptions. Carefully researching and choosing an experienced advisor who can anticipate these challenges and proactively address issues will help put you in a better position as you begin meeting with and negotiating with potential buyers. In addition, the best advisors are those that not only have experience, but also have demonstrated the ability to adapt to changing market conditions and apply refined techniques for the unique nuances of your sale process.
In the end, the right advisor must have unique a combination of transaction skills, relevant industry experience, trustworthiness, and commitment to your success. If you focus on the above questions, you have a better understanding of how to choose an investment banker and improve the chance of choosing the right advisor to sell your company.
If you are a business owner that has gone through a sale process or an advisor that has represented business owners, we would appreciate your thoughts, comments, and/or stories below.