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When to hire an investment banker and what to look for

KEY ARTICLE TAKEAWAYS

Learn why an investment banker will be worth the fees 

When planning a sale of your company, learn when to start interviewing investment bankers 

Understand what to look for when hiring an investment banker 

When should I start looking to hire an investment banker?

Deciding when to sell your business is an important decision, but if you wait too long to put your advisory team together, you might miss an opportunity to create additional value and ensure a smoother transaction process. You will definitely need an attorney, an accountant, and either a business broker or investment banker. Here we discuss whether a business broker or investment bank would be a better choice for your company. 

But when should you start looking to hire your investment banker? There are really three options for you in terms of the best time to make this decision: 

1.

You have been approached by a buyer (a “one-off” deal).

2.

You are ready to sell in the next 6-12 months. 

3.

You are thinking about selling in 1-5 years. 

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You have been approached by a buyer (a “one-off” deal).

As a business owner, you probably get calls all the time from people who say they are interested in buying your company. These calls might be from investment bankers claiming they represent a buyer who is interested in your company. They might come from private equity firms. And they might come directly from other companies in your industry.

Sometimes it can be hard to tell how serious these buyers are, whether they actually have the capital to consummate a deal, and whether it will be worth your time to engage with them on any serious level. We have seen far too many examples of business owners engaging with buyers who were either not serious, did not have the capital, or were trying to negotiate a deal only to renegotiate the purchase price during due diligence. None of these situations are good for a business owner. 

If you have been approached by a buyer, and you have convinced yourself that they are a serious, qualified buyer with high integrity, before you start providing financial or other information to them, you should hire an investment banker.  

An investment banker will do three things for you at this stage:  

Qualify your buyer. A good investment banker will have the experience and knowledge to competently vet your potential buyer to make sure they check all the right boxes. This will help ensure you don’t waste time with someone who is not qualified or serious. 

Create impression of competition. The simple act of hiring an investment banker to represent you tells your buyer that you are serious about the transaction. For highly qualified buyers, this is a good sign to them. In addition, an experienced investment banker will also let your buyer know that there is the real potential you will talk with other potential buyers the investment banker will find for you. This will keep the buyer honest with the threat that if they don’t offer a fair price and terms, you will look elsewhere. In our experience, simply having an investment banker can help increase the purchase price 10-30%. 

Manage due diligence and agreement negotiations. A good investment banker will be able to represent you during the negotiations and due diligence period. Most business owners believe the tough part of a transaction is finding a buyer and negotiating the deal. Wrong. The most challenging part of a transaction is once you have signed the letter of intent and are going through the buyer’s due diligence and negotiating the detailed terms of the purchase agreement. While your attorney will be deeply involved, having a good investment banker will speed things along and will help you navigate the minefields of a transaction. There are untold ways a transaction can go sideways during this period of exclusivity (when you are only able to discuss selling your company with this one buyer). You will benefit from having someone who is experienced at managing both the due diligence process and the negotiation of the final agreements on your side. 

You want to sell in the next 6-12 months.

If you want to sell your business in the next 6-12 months, you have an opportunity to run a full investment banking process. In this process, your investment banker will help you build your unique story to share with bidders, prepare your company for due diligence, help you prepare your financials and projection model, and source and initiate discussions with potential buyers.

In so doing, you will benefit greatly from your investment banker’s experience with the transaction process.

Without fail, we talk with clients after a transaction and ask them what surprised them the most. Their answer? They did not realize just how involved, challenging, and complex the transaction process was. They could not imagine trying to “self-medicate” and manage a process like this on their own with no prior experience.

If you plan to sell in the next 6-12 months, you should immediately start looking for an investment banker to represent you.

You want to sell in the next 1-5 years.

Many business owners are so busy running their company that they don’t start planning far enough ahead of time. If you are thinking of your exit plans far enough in advance (say 1-5 years), you are way ahead of most business owners. This is a good thing.

If you have a year or more to orchestrate your exit, you can start to identify and address issues in your business that might lower your company’s value, you can resolve risks that could prevent a deal from ever happening, and you can prepare for a transaction so that when it comes time to sell, you have already done a lot of the work ahead of time. This is a big advantage. Our CoPilot Assessment is a great way to begin these steps.  

Transactions are distracting. If your team has a month or two to scramble to put materials together, collect due diligence items, prepare financial forecasts, and get ready for management meetings, they will undoubtedly be distracted from their day jobs. This distraction can lead to business under-performance at precisely the wrong time – when you are trying to sell your company. 

Spending time a year or more ahead of when you plan to sell means you can pace your preparation over many months instead of just a couple months. This also means that if you or your advisors find legal, business or other issues in your business, you have time and runway to address and resolve them. We use our CoPilot tool to help us identify and prioritize these issues with clients – it is invaluable because it gives us a window into what investors are going to think of the business well ahead of when we talk with investors. It is like knowing exactly what your prospect’s sales objections are, months ahead of when you are pitching them. You get a copy of the test ahead of time. 

Spending time a year or more ahead of when you plan to sell means you can pace your preparation over many months instead of just a couple months. This also means that if you or your advisors find legal, business or other issues in your business, you have time and runway to address and resolve them. We use our CoPilot tool to help us identify and prioritize these issues with clients – it is invaluable because it gives us a window into what investors are going to think of the business well ahead of when we talk with investors. It is like knowing exactly what your prospect’s sales objections are, months ahead of when you are pitching them. You get a copy of the test ahead of time. 

So, does this mean you should hire your investment banker 1-5 years ahead of time? It depends. Many investment bankers are not equipped or have the experience to help companies address operating or other issues ahead of going to market. Others are simply unwilling to invest this type of time and energy into a client this far ahead of a potential transaction (remember that investment banks get paid most of their fees upon the closing of a successful transaction).  

However, there are other investment banks that have developed an exit planning process and, assuming they have the relevant experience and processes to do so, can be invaluable in helping you get your business ready years ahead of a potential transaction. At Class VI, our Pathfinder process (starting with CoPilot) is designed to last from 1-3 years, and we have executed this process with dozens of clients with significant success. Pathfinder makes the deal process smoother and the valuations higher. If you can find an investment bank that offers these services, you would be well advised to hire them early so they can help you craft the perfect exit. 

What should you look for in an investment banker?

Hiring an investment banker can be daunting. Sort of like picking a heart surgeon. Most people have never had experience with an investment banker. As a result, they don’t necessarily know the right questions to ask or how to pick one.

The sale of your business is likely one of the most important, and most stressful, transactions you will consummate. When you hire your investment bank, you want to hire someone who is experienced with transactions, has a long track record of success with clients, and who has a disciplined, proven process. 

Many sellers want an investment banker who specializes in their particular industry. While this can be helpful, our experience is that it can backfire. Industry specialists typically put companies into a “box” so that your story may not look “unique” to buyers. Industry specialists also typically target the same group of buyers for every deal, and often represent those same buyers in other transactions, which poses a risk of a conflict of interest. Their process, if it simply targets the “usual suspects,” can miss outlier bids that could mean an additional 20-30% in purchase price. 

You will want to talk with their prior clients – preferably clients you pick from their website transaction list (versus hand-picked references they give you). Ask those prior clients about their experience – were they delighted, did they get more than they thought they would, was the banker available 24×7, etc.?  

We have developed a sample request for proposal you can use to have investment bankers complete so you can compare apples to apples. Just e-mail us at [email protected]

AUTHORED BY:

Bobby Motch  |  Associate  |  Class VI Securities, LLC

As an Associate at Class VI, Bobby has experience in transaction execution and board advisory services for clients in a variety of industries, including consumer products, food and beverage, business services, software-as-a-service, manufacturing, and distribution. Additionally, Bobby contributes to the development of Class VI’s CoPilot services and Class VI content creation.

The views expressed represent the opinion of Class VI Partners. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness.  While Class VI Partners believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the Class VI Partners view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Testimonial may not be representative of the experience of other customers. Testimonials are no guarantee of future performance or success. Testimonials are NOT paid testimonials.
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