Looking to sell your business?
M&A is complex, and sellers in the middle market have a few inherent disadvantages that can make the process more difficult, including:
- Many sellers don’t have experience with transactions
- Most sellers don’t know the true value of their business
- It’s hard to uncover middle market M&A transaction data
- Sellers are balancing the demands of the transaction and day-to-day operations
Investment bankers position themselves to business owners as a solution to these inefficiencies. They help sellers manage the deal process, stay on top of their business, and find the right buyer at the best price.
But do investment bankers actually add value?
One-hundred percent of owners who sold their business with the help of an investment banker said yes, according to a recent study from Fairfield University professor Dr. Michael McDonald, titled “The Value of Middle Market Investment Bankers.” McDonald surveyed 85 business owners who sold their businesses with the help of investment bankers for between $10 million and $250 million during the period from 2011 to 2016. Sixty-nine percent said that the value added by bankers was “significant.”
Here are two more of the survey’s key results.
1. For 84% of business owners, their final sale price was equal to or higher than the initial sale price estimate provided by the banker.
An increased purchase price can make the fee of partnering with an investment bank more than worth it. As the study notes, “Final transaction fees vary widely from firm to firm but are typically based on the size of the transaction and the services provided. Retainer fees paid by the client are sometimes deducted from the final transaction fee that is paid at closing.”
According to the report, in a full auction process, fees likely fall into these ranges:
“Notably, these fees decrease as the transaction size increases,” the report notes. “Many banks tier their fees so they get paid a set percentage of the likely purchase price (which is agreed upon by the client and investment banker at the beginning of the process) and then set a higher percentage above that target providing incentives and reward for exceeding expectations.”
2. Business owners saw “managing the M&A process” as the most valuable service the banker provided.
This includes organizing a go-to-market plan and executing on that plan, including creating teasers and CIMs, managing the data room, negotiating key terms and conditions, and managing to a timeline.
Business owners also lean on bankers to negotiate the transaction, prepare the company for sale, and add credibility to their profile as a seller.
“Representation definitely got us a better price and more favorable terms,” noted one respondent.
Another advised, “Unless you have substantial expertise, a broad buyer network, and a lot of free time, partner with an investment bank. You may be able to get it done yourself, but you’ll be leaving millions of dollars on the table as well as closing a higher risk transaction (when it comes to representations, warranties, and indemnifications).”
Read the full report here.
Michael Carter of Carter Morse & Mathias, who conceived and organized this survey, felt it was important for business owners to hear not only from investment bankers, but from fellow business owners — particularly those who have sold companies with the help of bankers. “The survey results quantify the value that sellers attribute to their banker and validate their value proposition,” says Carter.