Choosing a qualified, experienced investment banker with relevant transaction experience to represent your company might be the most important decision you make to ensure a successful sale of your business. 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, the quality of their relationships, negotiating prowess, and overall transaction experience.
This article is the continuation of a running checklist we’re developing to help business owners go through the process of successfully identifying and selecting the right M&A advisor to represent their company. In this post, we cover five key considerations when selecting an advisory firm, including the questions that can help you evaluate each of the below.
Perhaps the most important question you want answered when talking to an M&A advisor is: “Can they actually get a deal done?” With the plethora of potential pitfalls that can derail or prolong a transaction (which can take 6-12 months to get done as it is), you’ll want a high degree of confidence that your banker has the credentials and experience to move your deal along to a close. There’s no better way to validate someone’s experience than to ask about prior transactions they’ve worked on:
What comparable transactions have you completed in the past 4-5 years?
Make sure the advisor provides examples of companies in both your industry and of a comparable company size. By “industry,” we mean as close to your specific niche as possible – “manufacturing” isn’t the same as “commercial flooring products,” for example. Recent industry experience will ensure that they have up-to-date and deeper insight into who is actively making acquisitions in your space, and an existing foundation of knowledge for preparing your marketing materials. The size of past transactions is also important since, as with your industry, the size of your company dictates which financial and strategic buyers are the right partner for you. A banker with experience advising companies with $10-100M in revenue will have a vastly different network than one who has historically advised $400M or $500M companies. Size is also important because it indicates who specifically from the advisory firm will be working day to day with your organization (more on evaluating your M&A team below).
How many M&A assignments have you worked on in the last three years that didn’t close and why?
This is critical due diligence. While a fair number of deals fall apart for reasons beyond either the banker or seller’s control, you’ll want to tease out which of these reasons are legitimate and which seem like excuses by the banker. 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 run for the hills.
Depending on your company’s size, you’ll meet with firms of various team sizes and organizational structures, ranging from solo advisors and boutique firms with two to three senior bankers to mid-sized regional banks with a pyramid structure of partners, senior/mid-level professionals, and junior associates/analysts. Given that much of the value that an M&A firm brings to the table comes from the experience and network of its senior bankers, you’ll want to be comfortable with the involvement and level of attention you get from the senior banker on your deal team:
Walk me through the role of each deal professional at each stage of the transaction process.
There are almost a dozen steps in the process of selling a company, and you may be OK with junior bankers handling the early stages of preparing materials for your company (and maybe even the initial outreach to potential buyers if that pool is large). But you’ll want the senior banker to bring his years of experience when it’s time to begin more serious conversations with potential investors or acquirers.
How many clients do you typically take on in a given year, and how many do you expect to take on this year?
Bankers get busy, too. If a banker takes a meeting with you despite already having a full pipeline of upcoming engagements, you should feel free to ask them how they plan to allocate their time and attention among their clients to ensure you’re not being sidelined for other projects.
Valuation and Fee Structure
At a certain point in your conversation, the topic will shift to two important sets of numbers: what’s my company worth, and what will you charge me for your services? Highly qualified bankers are approached by more clients than they can handle, so they charge retainers to ensure the clients they do take on are highly motivated. So as tempting as it is to simply choose whichever M&A advisor charges you the lowest fees, you should treat this decision as an investment in your business — and your goal should be to maximize the ROI from hiring the right bank to get you the highest purchase price for your company:
What valuation range should I expect for my business and why?
At the end of it all, your business is only worth as much as someone is willing to pay for it. But a good banker should know enough about industry trends, current market activity, average multiples, and other valuation factors to give you a ballpark figure of what your company is worth. Just be careful not to enter the conversation with unrealistic expectations about your company’s value, and be sure to hear out how the banker’s assumptions and rationale.
Tell me about your fee structure.
Some combination of a retainer and a success fee is the most common way that an M&A advisory firm will charge for its services. The exact mix will vary from firm to firm, but be wary of structures that veer too far one way or the other. Banks that charge a large upfront retainer but little in the way of success fees won’t be strongly motivated to get a deal done (since the majority of a bank’s payout should come from a successful close), and firms that take on “clients” on a success-/fee-only basis are likely playing the numbers game and don’t actually close a higher percentage of the engagements they take on.
Continue reading part 2 of this post to learn how to evaluate the non-transactional value-add that a banker will bring to the table: 10 Questions to Ask When Choosing an Investment Banker – Part 2.