Selling a middle market business is a unique experience for most owners. It is therefore essential that the selection of an investment banker is done in an informed and considered way, otherwise you risk making the wrong choice, costing you time and money and possibly ending up with the wrong buyer. or no buyer (one in four engagements fails to lead to a transaction).
Let’s first see how investment bankers should be at the service of their customers:
- Tell and sell the story. An investment banker should present the company’s history in a comprehensive but digestible confidential memorandum for potential buyers. This also includes organizing all the documents that will be requested by a prospect.
- Be the conduit to relevant buyers. The banker must be able to leverage relationships to bring relevant buyers to the table. Investment bankers perform the initial screening of serious candidates, before involving the owner. Most owners would rather meet with 10 highly targeted prospects than invest the time to speak with 100 or 1,000.
- Execution of a confidential process. Much like when selling a home, the best tool for maximizing the purchase price is to inject a sense of competition. Although each transaction is unique, it usually involves engaging with multiple potential buyers in parallel.
If the investment banker does a poor job in any or all of these key functions, the salesperson could end up in something of a purgatory, even if the fundamentals of the business are strong. Indeed, in standard investment banking contracts, the seller is contractually obligated to pay the investment banker for at least 12 months and sometimes up to three years. Getting out of the contract is difficult; most will have to wait.
Now let’s look at some all-too-common confusion.
“I can get you as much $$$”: Some investment bankers promise owners high numbers, knowing full well that they are very unlikely to get them. One way to test their optimistic pricing is to enter into a contract with a heavily weighted commission structure based on this number. Still interested?
Bait and switch: Many companies scroll through their seasoned partners just to sell the engagement, then quickly hand over your offer to a junior resource before the ink dries. This frequently occurs when the transaction is small compared to the company’s average transaction size. Many groups view these assignments as a “low risk” opportunity to provide real-world training to their less experienced team members. Be sure to ask who will specifically lead your project, their relevant qualifications, and their expected time commitment.
Spray and Pray: Others will open up the opportunity to too many irrelevant parties, wasting an owner’s time with unserious leads, lengthening an already stressful sales process, and risking all-important confidentiality at risk. If it becomes known that the business is for sale, employee morale may suffer, customer loyalty may suffer, and competitors may take advantage at a time when maximizing business performance is critical.
Simply not efficient: The worst offenders sign up companies, charge a deposit up front, and do nothing. Unfortunately, this is all too common.
So what’s a business owner to do? Homework.
- Take the time to understand the background and integrity of potential investment bankers. Ask to see their past experience and speak independently to past clients, not just the ones they refer. Ask these references what advice they received, how well they were represented, and their overall level of satisfaction.
- Ask investment bankers to guide you through their process. Even for a niche industry they may not have much experience in, providing a detailed and organized plan, coupled with insightful research and recommendations, can indicate whether they will be effective for successful execution.
- Ask about the support owners receive in arranging materials for potential buyers. Buyers expect documents, sometimes tens of thousands, to be quickly delivered on a silver platter. Will your investment banker help you prepare the requested reports or is it entirely up to you to provide them? The latter could mean hundreds of hours of work during this critical period. Remember that if you spend too much time on the selling process and trading performance begins to decline, it will be very difficult to sell at a reasonable price.
- Spend some time understanding how they came up with a rating for your business. Understand deliverables and ensure what they deliver matches you to want.
- Make sure all your interests are represented. Are there other considerations such as finding a good cultural fit, accommodating family members or current employees, or needing cash up front? Find someone you are comfortable with and who understands your needs. Remember that a typical sales process takes 6-15 months.
Selling a business is not like a real estate transaction where the deal is done and the buyer is never seen again. For most middle market transactions, there may be equity to align interests, the seller may lend a portion of the purchase price, or there may be performance incentives or other contingencies. Typically, sellers remain in a financial relationship with buyers for two to more than 10 years. It is important that investment bankers educate sellers on all of this so that they are equipped to compare apples to apples among different offers.