To Hire Or Not To Hire An Investment Banker When Selling Your Business
In the intricate realm of mergers and acquisitions (M&A), the decision to enlist the services of an investment banker stands as a critical crossroads for most business owners. This article explores the pros and cons of involving an investment banker in M&A deals. By providing an in-depth exploration of both perspectives, our aim at The Exit Group is to empower business owners with a profound understanding of this pivotal decision-making process.
Pros of Hiring an Investment Banker
Exposure to Diverse Buyer Groups
The foremost advantage of involving an investment banker is the access it grants to a broad spectrum of potential buyers. This exposure not only widens the reach of your company in the market but also substantially bolsters the likelihood of finding an ideal match.
Potential for Higher Valuation
Armed with a wealth of experience and a nuanced understanding of market dynamics, an adept investment banker has the expertise to position your company strategically. This exposure to multiple acquirers could (but not always) lead to a “bidding war which in turn may lead to securing a higher sale price, thereby maximizing returns for the seller.
Dedicated Professional Guidance
The engagement of an investment banker translates to having a steadfast ally, a seasoned professional who is wholly committed to guiding you through the complex M&A process.
This dedicated expert can offer invaluable strategic counsel, will expertly navigate complex negotiations, and ensures that your interests are represented with utmost diligence.
Cons of Hiring an Investment Banker
Upfront Retainer Costs
Among the significant considerations is the requirement for an upfront retainer fee—a financial commitment that may pose a challenge for sellers. This makes some business owners feel like they need to commit to a sale prior to knowing what they may get in terms of valuation.
This initial investment is a necessary step in the investment banking process. Sometimes you may be unsure if the right fit is out there in terms of culture and valuation. While you ultimately can decide to walk away by spending time and money on running a process you may feel more inclined to go through with a deal you may otherwise have decided against.
Time-Intensive Preparation
The creation of the Confidential Information Memorandum (CIM) is an arduous undertaking, often spanning up to six months. This investment of time can be a substantial burden for business owners, necessitating a diversion of attention from their day-to-day operations. This distraction could possibly lead to a downturn in the business which further decreases your chances of optimizing an exit.
Extended Deal Timelines
M&A transactions facilitated by investment bankers often necessitate a substantial temporal investment. Deals can take at least a year to materialize, and unforeseen circumstances can lead to further delays. These could be macro factors such as a downturn in the economy, higher interest rates etc. Or could be something business related potentially impacting the overall outcome.
High Deal Failure Rates
It’s imperative to acknowledge that not every deal orchestrated by investment bankers reaches a successful conclusion. In fact, a high % of deals may not come to fruition, leaving sellers without the desired outcome. Industry statistics show that close to 50% of banked processes do not end in a transaction.
Confidentiality Risks in Unsuccessful Processes
In the unfortunate event of a failed process, confidentiality is compromised. Sometimes the CIM is sent to 100’s of groups if the process is wide which despite an nda could have consequences. This can have lasting implications as potential buyers gain insight into your company’s performance without committing to a deal.
Post-Process Sale Challenges
If a company is unable to secure a deal during the process, they may face difficulties in selling their business for up to two years. This is because you must pay the investment banker’s fee if a sale happens with a group they introduced during the process. Some business owners decide to wait out this “tail” period and pursue a transaction on their own once the banker engagement has expired.
The Alternative Approach:
Direct Dialogue or Buy-Side Advisor
An alternative approach worth considering is working directly with a few buyers or working with a firm like The Exit Group. This option entails no upfront costs for the seller, as the fee is borne by the buyer. Additionally, working with a firm specializing in private equity transactions can yield major benefits, as entities like The Exit Group often have established relationships with a multitude of reputable buyers and can reach the end goal quickly and quietly.
Conclusion
While hiring an investment banker can provide a range of benefits, it is essential to weigh these against the potential drawbacks. Sellers must carefully evaluate their specific circumstances and consider alternative approaches.
It is true that it is important to have someone in your corner looking out for your best interests throughout a sales process. A lot of this stress can be alleviated by having an experienced M&A attorney reviewing agreements and pushing for terms that best fit what you are looking for post transaction.
Ultimately, the decision should align with the seller’s objectives and long-term vision for their business. Remember, a well-informed choice is the cornerstone of a successful M&A transaction, shaping the future trajectory of your enterprise. Beware of being sold a bill of goods on the front end with a potential banker promising sky-high valuations. While the more quality firms will be knowledgeable and work with integrity investment banks are motivated not just to complete a successful transaction but to get the retainer signed.
For further insights on this topic, we invite you to watch our informative video here.
In the video, we delve deeper into the sell-side process—a method frequently utilized by business owners to sell their companies.
This involves enlisting the expertise of an investment banker who orchestrates the process, from preparing materials to conducting an auction to attract potential buyers.
The sell-side process offers distinct advantages, including increased competition among potential buyers and professional assistance in preparing crucial materials. However, it’s important to be aware of the potential drawbacks.
To learn more about these advantages and drawbacks, feel free to watch the full video.