As an entrepreneur, you built your business minimizing unnecessary expenses. So when it comes time to sell your company, of course you could do it yourself – especially when you calculate the likely fee for hiring an investment banker (often also referred to as an M&A advisor).
As an entrepreneur myself, I get it. The urge to do it yourself by figuring things out is a strong one. But study after study shows that hiring the right investment banker yields a high financial payoff. For instance, a University of Alabama and Portland State University study involving 4,468 transactions over a 20-year period estimated that sellers who hired an investment banker received valuation premiums around 25 percent, depending on their methodology. Perhaps more insightful, this study also found that more than 99 percent of the 1,727 business sales by sophisticated institutional sellers involved an investment banker. That finding is pretty amazing considering that a majority of private equity investors are former investment bankers and typically have a large contact list of potentially interested buyers. Clearly, they could easily sell a business themselves if they wanted to, but they know that hiring an external advisor brings them a huge return on investment—mathematically the ROI is nearly infinite since a success fee is only paid if they choose to accept a deal they find compelling.
Similarly, Northern Trust’s Business Advisory Services group analyzed 4,316 transactions and found that sellers represented by an investment banker obtained an average EBITDA multiple 1.5x higher, with narrower dispersion in outcomes (i.e. lower risk).
In fact, these premiums are often much larger, based on anecdotal and personal experience. But like any professional you hire, advisors are not created equal– quality and negotiating skills differ dramatically among individuals even within a single firm.
The value of expertise
While an owner is the subject matter expert of their business, investment bankers are experts in the process of selling companies. Most business owners have never sold a company before, so having seasoned experts sharing their wealth of knowledge and managing the entire process will help get the deal successfully across the finish line, while minimizing the stress and anxiety associated with what is typically the largest financial transaction of a sellers’ life.
Aside from the total purchase price, here are a few of the most important advantages that savvy business owners can realize by engaging an investment banker:
– Greater cash paid up-front with the best terms. Think about how much more effective you are now than your first day in the industry— given the complexity, relevant experience is arguably even more important when selling a business, and the stakes are definitely much higher. And remember, this is likely not your buyer’s first rodeo.
– Increased likelihood of a successful closing. You don’t want to spend hundreds of thousands of dollars in legal and accounting fees only to see the sale fall apart. Because the market often interprets a business that fails to transact as “damaged goods,” the business frequently gets taken off the market for a prolonged period before trying again.
– Staying focused on your core business. We often see a performance decline in companies that attempt to sell on their own given the significant time commitment involved. This will create an opportunity for the buyer to decrease the initial offer before the closing, putting you in the difficult situation of having to either sell the business at a discount or waiting to re-stabilize the business.
– Reduced stress levels. The time and stress involved in selling a business is even more burdensome if you’re trying to learn and master the subject on the fly.
In addition, hiring an investment banker adds credibility, giving the prospective buyer the impression that there are competing strategic buyers for the acquisition. I have a client who was told by a potential buyer that the valuation range would likely be 3-6x EBITDA. In my initial call with representatives from that same company they voluntarily mentioned that they knew that I knew that businesses in the industry are trading at 10-15x.
In other words, buyers know they are dealing with a sophisticated party, and if reasonable terms are not offered, it’s implicit that the process will turn competitive. It also sends a strong message that the seller is committed to the sale. The addition of professional representation will keep the buyers anchored to a specific timing, ensuring that there are multiple potential buyers at every stage of the process, and further preventing any lowball offers.
The bottom line: you can live with total confidence that you received the absolute best options and price possible by being represented by an expert M&A advisor.
It’s not just the money
I would never underestimate the importance of maximizing the financial proceeds from the sale of your life’s work. But the right investment banker can also make sure that the other terms in the deal are fully aligned with your desired exit strategy and personal goals. That’s the best way to prevent a case of seller’s remorse, which is estimated to occur in nearly 3 out of 4 transactions.
While there are several emotional factors contributing to this, one driver of this feeling is a bad post- sale fit with the buyer.
An investment banker with prior experience with multiple buyers can provide insights regarding who pays top dollar, who honors their word, and who would be the best fit for the seller. And when it comes to selling companies, experience matters.
Managing the transaction process
Better outcomes from investment bankers don’t come through magic. They result from a methodical process, combined with insights development from handling a wide range of deals. Let’s delve into the specific tactics and factors that result in higher values and improved outcomes.
First of all, an investment banker will run a full due diligence process on you to anticipate buyer questions and to gather and organize all of the relevant documents in a data room. The firm will also use that information to create a detailed financial projections model to justify value and a compelling confidential information memorandum (CIM) to highlight the relevant deal-points and tell the story of the business. As you can imagine, this requires an extensive time commitment that averages 1,200 to 1,500 hours throughout the entire sales process.
Based on that knowledge, the M&A advisor will then handle initial calls with prospective parties on your behalf. That’s a significant advantage for owners since the opportunity cost of answering the perhaps 100 or more introductory get-to-know-you-calls is huge. The investment banker will also manage the workflow with other advisors and attorneys, negotiate and structure the transaction, and quarterback any other necessary items that may get in the way of a successful closing.
A result of running a methodical process should be several compelling offers from buyers, allowing the seller to choose the right combination of price and overall fit from a position of strength.
Framing the opportunity
The job of an investment banker is to sell the business by leveraging persuasion, market insights, and relationships to induce the best offers. Bidding wars occur when buyers engage emotionally and the best way to engage someone emotionally is generally by telling compelling stories or narratives. A strong advisor can create an exciting and engaging story for the buyer, while placing a positive spin on potentially negative aspects of the deal.
Through prior deal-making experience and keeping abreast of market trends, investment bankers know what buyers are looking for – both the good and bad – and will help reframe the business to benefit from the most favorable description/ category, and present mitigating factors for the challenges of the business. For example, many bankers have been able to achieve outsized multiples in otherwise boring industries by characterizing them as “technology-enabled.”
Maximizing competitive intensity
Investment bankers know that maximum prices and other positive outcomes occur because of competition or the threat of it. Put yourself in the buyer’s shoes: All other things equal, you want to pay the least amount possible for what you buy. If you know you’re the only one competing, are you going to present your highest and best offer? Of course not, since there’s no incentive to raise your offer. Many sellers already have an interested buyer and mistakenly believe that the battle is nearly won at that point.
Another factor to consider is that each of the interested buyers needs to be at roughly the same spot of the competitive process. Otherwise, you may be in a position to choose a suboptimal offer or decline and wait for something better. Part of the art of investment banking is speeding up and slowing down various interested parties to keep them in synch.
Other tasks of the investment banker are tedious but valuable project management tasks, such as ensuring that outreach and follow up occurs quickly and consistently, customizing documents across various buyers, and keeping track of what was said and provided to whom.
As an owner, you may find it difficult to identity and approach the right buyers – particularly if the marketing plan involves hundreds of prospects. It is also difficult – if not impossible – to approach potentially interested parties confidentially. Often your competitors are in the best position to offer the highest price but engaging with them
generally comes with significant risk. An M&A Advisor can help design a customized approach to minimize the chances that your inside information will be used against you.
Leveraging negotiation skills honed through experience
Along with finding the right buyers, investment bankers will take the lead in negotiating the terms — not only purchase price but also the terms and conditions, timing, and other major considerations of the transaction, such as the mix between cash, equity, seller notes, and earnouts.
Effective negotiation requires strategy and soft skills, such as the ability to establish rapport with the other side of a deal and discern when to stand firm and when to make concessions during the negotiation process. The best negotiators I know all have exceptional skills in reading their counterparty psychologically, particularly regarding their motivations. They use their experience and insights with the art of negotiation, such as the timing of interactions and responses, particularly “bad news,” optimal phrasing, and making concessions. They use creativity to find a middle ground to get to “yes.” Investment bankers can structure each transaction specifically to address the needs and desires of both sellers and buyers, thus providing creative solutions for potentially conflicting objectives.
During negotiations, one of the benefits of working with an advisor is the ability to negotiate with limited authority. As an agent, an advisor cannot agree to concessions and commitments, so there’s always the chance to “take stuff back.” When negotiating as the actual decision maker, you don’t have this luxury. This tactic is most often used when buying a car– there’s a reason why the store manager never just comes out and negotiates directly with you.
Finally, good negotiators keep the emotional side of transactions at bay. Just as doctors don’t treat their family members and lawyers don’t represent themselves, investment bankers keep the negotiations going on a professional, rather than a personal level. They can also serve as the “bad” guy who pushes hard without jeopardizing a strong working relationship with the buyer going forward.
Conclusion: Don’t do it yourself!
A study by Fairfield University entitled “The Value of Middle Market Investment Bankers” surveyed business owners who sold their businesses for between $10 million and $250 million with its findings best summarized by quoting one recent seller:
“Unless you have substantial expertise, a broad buyer network, and a lot of free time, partner with an investment bank. You may be able to get it done yourself, but you’ll be leaving millions of dollars on the table as well as closing a higher risk transaction (when it comes to representations, warranties, and indemnifications).”