Knowledge Center

Thursday, December 31, 2009

In Support of the Investment Banker

Berk, Keith H. and Alan D. Leib. "In Support of the Investment Banker." Oracle. 2009.

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by Keith H. Berk and Alan D. Leib

So why do business owners want to hate investment bankers? Too often, it is based on cocktail party chatter. Have you ever heard, "the investment bankers added no value to the process? I already knew the buyer. We were competitors for years." Or, "the investment bankers wrote a nice book, but at the end of the day my lawyer and I negotiated the deal. The investment bankers just picked up a big paycheck." Or, "all investments bankers are whores. They would sell their mother if they could."

We have a different view of investment bankers. How would you go about selling your business without an investment banker? Most middle market businesses are reluctant to approach synergistic buyers because such companies are generally their competitors. By "opening their kimono" they are afraid that competitors will use this information in the market place to their advantage. Alternatively, most middle market businesses have limited access to financial buyers. Contacting a few financial buyers about a possible sale has a low probability of success and, even if successful, will probably not result in the best price, deal structure or terms. Finally, even if the middle market business is successful in locating the "perfect buyer," it is unlikely that the business has the internal capacity and skill sets to produce the volumes of information that an educated buyer will require.

We believe investment bankers are essential to maximize the value, structure and deal terms when selling a middle market business. Here are 10 reasons why:

  1. Good investment bankers know the market in which a business competes. They know the competitors, including the decision makers at the competitors.

  2. The right investment banker brings credibility and instant access.

  3. The right investment banker will have a team of people, including those young people right out of MBA school that can slice and dice your financial information in more ways than Emeril Lagasse can slice a tuna fish. Our experience is that this information is essential to maximizing the selling price and minimizing post- closing risks. This information is usually invaluable to the business even if it is not sold.

  4. An investment banker that develops a relationship with a middle market business, rather than one that is hired on a transactional basis, can provide guidance for many years, including the right time to go to market for financing or a sale.

  5. A relationship investment banker is likely to find synergistic opportunities for businesses, alert businesses to changes in the market, let businesses know about the plans of the major players, etc. Investment bankers that research markets have invaluable and abundant amounts of information.

  6. Investment bankers will bring discipline to a sale process.

  7. Investment bankers can access potential buyers and have conversations that the business owner cannot have. This can be done on a confidential basis without the disclosure of the potential selling company's name.

  8. Investment bankers can access a greater number of potential buyers and more effectively create an auction process. This auction can be public or private depending on the needs of the business.

  9. Good investment bankers know how to get things done in a sale process. This is an art not a science.

  10. Most middle market businesses do not have in-house business development skills. Investment bankers bring a wealth of experience and will help guide businesses through a difficult and often emotional process.

Our experience is that many middle market businesses believe they can go it alone without an investment banker. Often times we hear, "We just want to talk with our one key competitor and if they are not interested we will then hire an investment banker". In most cases this plan fails. Either a deal is never consummated or a deal is consummated with a selling price and terms that are less favorable than a market deal would provide.

We also hear that investment bankers are not to be trusted. We believe this is generally not true. But, like all business matters, confidentiality agreements and well-drafted engagement letters are important.

We do not believe that all investment bankers are great. We simply have found through experience that the right investment banker brings value to the middle market business. We have also found that in almost every case where our clients have interviewed two to four investment bankers prior to going to market, our clients have learned valuable information about their market and were better prepared for the sale process. Finally, without any empirical data, but based on years of experience in transactions with and without investment bankers, we have a strong belief that, on average, the middle market business brought to market by a good quality investment banker has a greater chance for a successful sale at a higher price, with more of the purchase price paid in cash and with lower post-closing risks than would have been obtained without an investment banker.

Choose your investment banker wisely. Network to get to the right firms, look for firms with significant expertise in your industry, meet with them on more than one occasion before retaining them and understand the team the firm will provide for you and the role of each team member.

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