Insights & News
Biz Owner Masterclass: Why Partner with an Investment Banker to Sell?
By Andy Stockett
Recently, I was invited to participate in Raymond James’ IBex Institute for Business Owner Excellence Master Class. In the interactive roundtable discussion with business owners, I shared insights on working with a lower market investment banking referral partner when selling your business.
Why Work With an Investment Banker?
A lot of business owners consider going it alone, thinking that a good accountant and attorney can handle the sale of their business. Others erroneously think that having an investment banking advisor will scare off a seller. The reality? Take it from a managing partner at a private equity firm, who said:
“If we’re negotiating with an owner, and he doesn’t have a seasoned advisor it’s probably not the first bad decision he’s made.”
Some business owners insist that their numbers are good on their own, while others don’t want to pay fees. This reminds me of one of my favorite “investment banking-isms”: “If you think using a professional is expensive, try using an amateur.” A lot of business owners choose the DIY approach to selling their business because they think it will be similar to selling a house. Maybe they already have an offer on the table, so … piece of cake, right?
The truth is, investment banking advisors are more than just number crunchers. Beyond the invaluable experience in structuring and negotiating transactions that they bring to the table, it’s about their judgment and deep understanding of their client’s objectives and what motivates buyers. As one colleague put it, “Our fund has completed over 1,000 acquisitions in 20 years versus 1 for most business owners … who’s probably leaving money on the table?”
Maximizing the Value of Your Business
An experienced advisor can help you maximize the value of your business for a sale through three key steps: preparation, perception, and positioning. Let’s take a closer look at how each step can help you achieve your sales objectives:
An advisor can come in with fresh eyes and assess the value drivers and risk factors that will impact the sale of your business. They also have many tools in their arsenal to accentuate your business’ value and mitigate risk. Equally important, as a trusted advisor they will sit down with you to help clarify your specific objectives with the sale, and then find the right buyer to achieve them.
Your advisor will also recast the company’s financial information to highlight what cashflow would look like in the hands of a new buyer, and structure the transaction in a tax-efficient manner. They’ll use their prior experience and industry databases to compile a broad list of buyers that might include publicly traded companies, foreign corporations, private equity funds and family offices. Do you have the time and expertise to do all that while simultaneously running your business?
It’s an investment banker’s job to thoroughly understand a buyer’s objectives and present your business as the ultimate vehicle to achieve them. They’re responsible for keeping the lines of communication open with buyers in a way that’s clear, credible and consistent. It’s also their job to build the story of your business through historical and projected financial information, along with all of the qualitative factors that go beyond the numbers to make a lasting impression.
As far as positioning, your advisor’s goal is to help you negotiate from a position of strength. You may be fine with the first offer you get, but you’d be surprised how much a little competition can increase the sales price. That’s where your investment banking partner comes in. Whether they’re drumming up real competition or the perception of a competitive threat, the goal is the same: drive up the price.
This is also where your advisor’s people skills come into play. They’re familiar with every type of buyer and buyer motivation. This helps them know how any given buyer will view the risk and reward of owning your business. And don’t forget about the brass tacks. Your advisor will determine if a buyer has both the ability and the motivation to pay market price — or better.
What Does the Sales Process Look Like?
The typical sales transaction takes around six to nine months, starting with the development process. This time is spent on industry research, financial analysis, identifying prospective buyers, creating the selling memorandum and organizing the data room. After that, the marketing process begins, which includes contacting prospective buyers, answering numerous questions, soliciting first round bids and conducting site visits. The next step is to evaluate final letters of intent and select a buyer.
Finally, the closing process takes around eight to ten weeks. During this time, your advisor will work closely with your M&A attorney (have a good one) to accurately document the business deal struck with the buyer, and navigate you through the tedious Quality of Earnings process, general due diligence and determination of a Working Capital Target that doesn’t cost you money.
We could talk all day about the benefits of stacking your sales team with an advisor, but we’d rather show you some real results so you can come to your own conclusions. Here are a couple of sales we’ve worked on at Four Bridges to give you an idea.
One client had an offer on the table for $18.5M and was reluctant to hire an advisor for fear of scaring off the buyer. Fortunately, he was convinced otherwise. The result? When another buyer was introduced to heat up the competition, the sales price increased by $17.5M, practically doubling the first offer. Competition led the original buyer to increase his offer three different times, landing on the final sales price of $36M.
It’s a story we’ve seen time and again. As when a different client came to us with an initial $20M offer from a private equity firm. After Four Bridges brought in a dozen potential buyers, the company received four offers over $30M and a final valuation of $39.5M.
We have other stories like these, and the results are not because we’re miracle workers … but because we understand how to run a professional, disciplined process and how to anticipate and manage the actions of buyers.
The bottom line is that it pays to have an advisor on your team when selling your business — quite literally. Beyond the sales price, a good advisor will ensure that your financial and personal goals are met, from maximizing cash received at closing to preserving your legacy and taking care of your employees.
Gearing up to sell your business? Drop us a line.