We sometimes hear business owners say, “I already know who is most likely to buy my business when I’m ready to sell. I know my industry better than an outsider. Why would I want to pay an investment banker to sell my business for me when I can do it myself?”
There is only one reason that you should hire any consultant: because you expect to make more money than the consultant will cost you. So, it makes sense to work with an investment banker if you believe that doing so will mean more money, better terms or both when you sell your business.
Is this a rational belief? Yes, it usually is. For example, one of the most likely acquirers identified by one of our clients submitted a bid of $16 million. Our client could have taken this deal and saved our fee. Instead, he retained FourBridges and got $33 million for his business from a buyer he previously did not know existed.
Why work with an investment banker?
1. Preparation pays.
A typical private equity investor looks at more than 100 opportunities for every investment closed, and he wants to make three to four investments a year, which means he needs to see a new opportunity every day. And not just see it, but take a close, hard look, because making one large, bad investment can put his ability to raise future funds at risk (and perhaps cost him a job or a career). To manage their own businesses effectively, investors have to say “no” early and often. Even late in the investment process, they are still looking for anything that might change the risk-reward equation, so a real or imagined “surprise” will almost always stop a deal or drop the price of an offer.
So, mistakes are costly and second chances are rare. Working with people who can anticipate and manage the issues can make the difference between a deal closing, dying or being re-negotiated in desperation. Experienced investment bankers are deal veterans who have made their share of mistakes and learned from them. They can share this experience and keep you from learning it at your expense. As I was told recently, “There’s no point kicking the mule a second time.”
2. Not everyone speaks “investor,” and not every investor knows your industry like a native.
Translation matters. We all know stories about someone who said something embarrassing in a foreign language. Business owners are fluent in the language that their clients and employees speak, but they usually do not know other languages, particularly “investor-ese,” so it is easy for them to inadvertently say the wrong thing. Often, like speaking with a polite person in a foreign country, you’ll never know what you said wrong when the conversation ends. Likewise, investors do not speak the language of your industry, so they might not see things the way you do. An investment banker’s job is to translate investors’ priorities and concerns to business owners as they prepare for a transaction, and then to be a filter – or sometimes, a buffer – as conversations progress.
3. It’s hard to see all of yourself in the mirror.
Investors will look at your business all the way around, asking about the warts and bruises that they notice, checking your information with outside sources and looking for holes in your story. A good investor will notice things you haven’t seen lately – your business’s equivalent of the mole in the middle of your back, or the size of the area where your hair is thinning. And what they see that you don’t will be used to negotiate a lower price, provided it doesn’t scare them off entirely. Working with an investment banker is like having a good investor on your side, helping you notice things you might not see and prepare your answer before negotiations.
4. Negotiation is a team sport.
We discussed this in a prior article published in AGBeat. A professional boxer doesn’t go up against an opponent alone. Sure, it’s just the two of them in the ring, but at the very least, he’s got his manager, trainer and agent right behind him. Similarly, a business owner shouldn’t hit the market solo. Before she considers a transaction, she should have an investment banker or financial advisor on her side, as well as an experienced corporate attorney and someone who can provide solid tax advice.
Buyers are pros. If you’re looking to sell to a private equity group, remember that they do this for a living. And if you’re considering a strategic acquirer, you’ll often be dealing with experienced business development executives. When in the ring with these folks, it helps to have a team of experts who not only can anticipate issues before they arise, but can also help you resolve them when they do.
5. Sales is a full time job.
While every business is different, the science of selling is pretty similar. A big number of leads becomes a smaller number of qualified prospects and a few of those become customers. Growing sales ends up being a question of generating more leads. When you’re pushing to hit the sales goal, the typical question is: Have I done everything I can to generate enough leads?
Selling a company isn’t much different than selling anything else. If you’re well prepared, know your market and can generate a large volume of leads, you’ll end up with more potential buyers, which could lead to an auction that will raise the price. Hiring an investment banker to help sell a business is like hiring an experienced salesperson to help hit your sales goal.
What are you getting for the money you pay an investment banker?
Using an investment banker can seem like a substantial investment. It is not unusual for investment banks to price their services using the “Double Lehman Formula,” which is 10 percent of the first million dollars in the transaction, eight percent of the second million, six percent of the third million, four percent of the fourth million and two percent of everything thereafter. It is also common for bankers to charge a monthly retainer while preparing a company for market.
This might seem like money that would otherwise be in your pocket after the deal. But would it? Again, history shows otherwise. For example, in one of the transactions FourBridges managed, approximately 50 buyers were contacted, with bids ranging from $25 million to $48 million. Had the business owner not worked with an advisor like us, which assured that the sale of the company was a thorough, well-managed process, it could have probably sold for less than with competitive bids.
We find that the decision to use an investment banker rests on answers to the following questions:
1. Can you position your company in “investor” terms by yourself and present its history and future in a way that minimizes the risk of a potential investor discovering something that changes the price at the end of the negotiation?
2. Do you have the time, network and experience to create an auction?
3. Do you believe you negotiate better alone or with a team?
4. Can you safely operate your business as if you’re selling it, before you sell?
5. Does it matter to you, your fellow shareholders, employees or family that you got the best available price?
If you want to read more about the perspective investment bankers bring to their clients’ planning, check out some of our other articles: