When entrepreneurs consider selling their company, many often think, “No one knows my company better than I do, and I know what my company is worth. Why hire an investment banker and pay fees when I can probably do a better job myself?”
Entrepreneurs often know peers who have hired investment bankers and got great results, and others who may not have had the best experience. This dilemma – to use an investment banker or manage the sale process alone – is one successful business owners often face.
When asked whether investment bankers add value, 100% of business owners who had gone through a sales process resoundingly responded yes, according to a 2016 study from Fairfield University, entitled “The Value of Middle-Market Investment Bankers.”
Selling your company is often a once-in-a-lifetime event for a business owner. There is only one advantage to going without an investment banker, which is saving the fee. However, there are several advantages to hiring an investment banker that each business owner should evaluate before selecting a course of action:
First and foremost, by hiring an investment banker, companies signal to a buyer that they have to work harder to win this asset, whether real or implied.
In general, buyers of businesses feel emboldened to seek advantageous terms when a seller lacks an investment bank. Often this is as simple as a buyer assuming that they are alone in looking at the target or at least part of a very small group. When a seller has a credible investment banker interfacing with a buyer, any educated buyer knows that a successful transaction will require them to pay a market price and offer terms consistent with this transaction type. Otherwise, buyers may employ various strategies to draw out the sale process, creating “deal fatigue” and setting the stage for a retrade later in the transaction.
A skilled investment bank knows transaction norms and will not let his/her client be taken advantage of. Furthermore, the investment bank will portray a strong element of competitive tension, regardless of the number of buyers in the process. Even if they run the process identically to what the seller would do, the simple act of hiring an investment bank will almost always result in a better outcome in both price and terms.
Secondly, companies get the advantage of having someone objective and disconnected from the company to negotiate on the seller’s behalf.
Hiring an investment bank allows owners to avoid negotiating directly with the other party. When an owner enters into negotiations, there will undoubtedly be many difficult, uncomfortable conversations that can sometimes become emotionally charged. Considering this transaction is often the most important deal of an owner’s life, it is sensible to have a layer of protection between the seller and buyer.
Additionally, many business owners stay in leadership roles following a transaction and work directly with the people that negotiated on behalf of the buyer. Having an advisor allows owners and key executives to insulate themselves from negotiations and preserve a positive working relationship with their new partners.
Thirdly, it’s crucial to ensure a company’s “house” is in order before launching a sale process.
When potential buyers approach companies, companies can enter into the negotiations before thinking things through and preparing the necessary documentation. This often results in frustrating and elongated negotiations, causing the breakdown of trust between the two parties.
As a result, the buyer often reduces the price or adds terms that are inferior to the initial proposal. In many instances, a transaction fails solely because the seller did not prepare properly. Investment banks know all of the necessary documentation to prepare for a buyer. Hiring an investment bank gives the seller the ability to slow down the clock and properly prepare for a sale process.
Owners benefit from working with someone who knows the required documents’ ins and outs, including any Quality of Earnings (“QoE”) or industry studies that need to be prepared. This results in buyers getting their questions answered quickly, which translates to an efficient process with limited exclusivity periods.
At the end of the day, whether the sales process includes 300 buyers or one buyer, the documentation required as part of a due diligence process will be nearly identical.
This brings us to the fourth consideration for owners; hiring an advisor helps owners avoid distraction.
Any process will take up management’s time, but running your own process often equates to not running your company, which invariably results in business underperformance.
An investment bank running the process, allows owners to continue to run the business and achieve the results necessary to ensure a buyer pays a final price consistent with their early indications. There’s no more critical time to map successful results to company projections than during a sales process.
Moreover, when asked what the greatest value investment banks provided, business owners saw “managing the M&A process” as the most valuable service, beyond “educating and coaching the owner,” “identifying and finding a buyer,” and “preparing the company for sale.”
Finally, let’s talk about the most important part of a sales process – valuation.
Hiring an investment banker, particularly one experienced in your company’s sector, means an owner has someone who truly understands the appropriate valuation and terms for deals of the seller’s size, characteristics, and industry. It ensures a credible source to advise on where to push back on negotiations, whether in value or structure, to ensure the deal outcome is as successful as possible for you.
Generally speaking, we find ourselves in a unique M&A environment with a lot of uncertainty around entering this market, given the COVID-19 overlay and changes in Washington, DC. By and large, both private equity and strategic buyers continue to be flush with capital. They are desperate to invest it in M&A. Financial and strategic buyers are actively trying to create their own deals, with aggressive outbound calling efforts to get companies to sell to them directly. Sellers are responding, as businesses stabilize and recover, by starting to reenter the market. The result is that we expect 2021 to be a very active year for M&A.
Recently, we have spoken with multiple business owners who have been contacted by potential buyers, and they wonder, “perhaps we can just do this on our own.”
The truth is, business owners can – but they do so for a price that typically far exceeds the banker’s fee. That price can be the loss of earnings while their attention is not on the business, loss of valuation, or an aborted sale due to lack of documentation or preparation. There is an old saying that the person who represents himself in court “has a fool for a client.” It is unlikely that adage will be substituted for the seller of a business and an investment banker, but there are many reasons to believe that a smart client has an investment banker in his corner.