Most of the time, the traditional investment banking business model is a very effective way to sell a middle-market business.
That is, when the market is functioning as it should, you’ll see middle-market companies engage with multiple viable buyers, all of whom are competing with each other to make a deal. Success is achieved when the seller receives the highest possible price in a reasonable amount of time.
However, business owners aren’t always so fortunate. I would estimate that these uncomplicated deals occur less than 50 percent of the time. Most opportunities require more complex decision-making on behalf of business executives. I have termed these “crossroads” deals, because the companies find themselves at a crossroads — unsure of which path leads to the greatest success.
Companies usually encounter crossroads deals for one of two reasons: too few options or too many.
Too few options
Business owners can reach a crossroads when dealing with limited options — sometimes by choice, and other times by happenstance.
A small business that my company recently worked with relied on a single large customer for the majority of its income. By marketing that relationship, the company was able to gain other smaller accounts. But when the company lost its one major client, it was left with only a few options forward — from significant cost reductions to asset liquidation — none of which were very attractive.
Other times, business owners and executive teams become hyper-focused on one opportunity that seems right, while completely ignoring competing offers. This tunnel vision can cause businesses to miss more advantageous offers, or at the least discourage the healthy competition that business transactions thrive on.
Another of my firm’s recent clients merged with an industry counterpart to complete an aggressive expansion plan, after many months of joint planning. In this case, they responded to a single offer — without checking the market for alternatives — and got something successful across the finish line. Their options, however, were to complete this deal or take their chances with what might show up in the future.
Too many options
It’s reasonable to guess that having too many options comes from great success. But that’s not always true. We see it most often with venture capital-backed companies that have failed to get the grip they wanted.
In this case, investors are creating urgency for a number of actions that can help them get their money back. And they are happy with many different definitions of success, including sale of the business for cash, sale for stock in another small company, revenue, joint venture, liquidation, and almost any combination of these.
Usually, business owners think of investment bankers as the professionals they hire to sell a business. But what if the decision in the company’s best interest involves not striking a clean deal or maybe any deal at all? Because the traditional investment banking profit model is based on a percentage fee of completed transactions, advising this course of action would mean that the investment bankers essentially receive no compensation for their work.
In crossroads deals, uncertainty conflicts with investment bankers’ goal to finalize the deal and receive a commission. While investment bankers with such a business model are talented and extremely useful, there is also a need for experts whose success is not dependent on whether or not a transaction takes place, and can assume a consultative role to help business owners weigh their business strategy and financial options in a fully objective way.
As the owner or an executive of a middle-market company, it’s wise to create a bench of trusted advisors in advance and determine who is best suited for the situation at hand. By establishing your team now, you’ll be better equipped for a crossroads situation if and when one occurs.