This article was originally published in Forbes.
Selling a middle market business is a once in a lifetime experience for most owners. Its therefore essential that the selection of an investment banker occur in an informed and thoughtful manner, or you risk making the wrong choice, costing time and money and possibly resulting in the wrong buyer or no buyer at all (one out of four engagements fails to result in a transaction).
Let’s first look at how investment bankers should be serving their clients:
- Telling and selling the story. An investment banker should package the business’ story into a comprehensive but digestible confidential memorandum for potential buyers. That includes also organizing all materials that will be requested by a prospect.
- Being the conduit to relevant buyers. The banker should be able to leverage relationships to bring relevant buyers to the table. Investment bankers do the initial screening for serious candidates, before involving the owner. Most owners prefer to meet 10 very targeted prospects than investing the time to speak with 100 or 1,000.
- Running a confidential process. Just like when selling a house, the best tool to maximize the purchase price is to inject a sense of competition. While each transaction is unique, this generally involves engaging with multiple prospective buyers in parallel.
If the investment banker does a poor job in any or all of these key duties, the seller could land in a kind of purgatory – even though business fundamentals are solid. That’s because 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 tough; most will have to wait it out.
Now let’s look at some all-too-common bamboozles.
“I can get you this much $$$”: Some investment bankers will promise owners high numbers, fully knowing that is highly unlikely they will get it. One way to test their optimistic pricing is to do a contract with a commission structure weighted heavily upon making that number. Still interested?
Bait and switch: Many firms parade in their seasoned partners just to sell the engagement, and then promptly hand your deal off to a junior resource before the ink dries. This frequently occurs when the deal is small relative to the firm’s average transaction size. Many groups view these engagements as a “low risk” opportunity to provide real-world training for their less experienced team members. Make sure to ask who specifically will be leading your project, their relevant qualifications, and their expected time commitment.
Spray and pray: Others will blast out the opportunity to too many non-relevant parties, wasting an owner’s time with non-serious prospects, stretching out an already stressful selling process, and risking all-important confidentiality. If word gets out the business is for sale, employee morale may suffer, customer loyalty may take a hit, and competitors could take advantage at a time when maximizing business performance is critical.
Just flat-out non-performing: The worst offenders sign the businesses up, charge a retainer upfront and then do nothing. Unfortunately, this is all too common.
So what’s a business owner to do? Homework.
- Take time to understand the prospective investment bankers’ track record and integrity. Ask to see their prior experience, and independently speak to former clients, not only the ones they suggest. Ask these references about the guidance they received, how fairly they were represented, and their overall satisfaction level.
- Ask investment bankers to walk you through their process. Even for a niche industry they may not have much experience in, providing a detailed and organized plan, paired with insightful research and recommendations can indicate whether they will be effective in successfully executing.
- Ask about how much support owners get in organizing materials for prospective buyers. Buyers expect documents – sometimes tens of thousands of them — to quickly be provided on a silver platter. Will your investment banker help you prepare the demanded reports or is it fully on you to deliver? The latter could mean hundreds of hours of work during this critical period. Remember, if you spend too much time on the sales process and business performance starts to decline, it will be very difficult to sell at a reasonable price.
- Spend time understanding how they came up with a valuation for your business. Understand the deliverables, and make sure that what they propose is what you want.
- Make sure all your interests are represented. Are there other considerations such as seeking a good cultural fit, accommodating family members or current employees, or needing cash upfront? Find someone you are comfortable with and who understands your needs. Remember, a typical selling process takes 6 to 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 deals, there may be some rollover equity to align interests, the seller may be loaning part of the purchase price, or there may be performance incentives or other contingencies. Typically, sellers remain in a financial relationship with the buyers for two to 10-plus years. It is important that investment bankers educate sellers on all of this so they are equipped to compare apples to apples among different offers.
Caveat venditor.
