How To Find the Right Investment Banking Firm When Selling Your Business

How To Find the Right Investment Banking Firm When Selling Your Business

In this guide, we’ll examine the criteria you can leverage to find the right investment banker, regardless of your company’s size or particular niche. The selection process is no small feat, but the reward could be drastic. Finding the right banker could result in a million-dollar difference — or even more.

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You’ve decided to sell your business and now you’re looking for an investment banker.

Where do you start looking? How large of a financial institution should you work with? What questions should you ask during the first meetings? How can you know if an institution and its lead individual will make a good fit for you and your business?

The questions are never ending.

Yet the relationship between you and your investment banker is crucial in maximizing the sale of your business. You need a firm and an individual who are right for the size of your company, have the knowledge for your industry and niche, who understand your desired outcome, and are willing to work hard to achieve it.

So how exactly do you find that?

The following guide will outline the major factors you need to analyze in order to find the right investment banker for you and your upcoming deal.

1. Find an investment banker that is the right size for you

This one is pretty straightforward: the size of your investment banking firm needs to correspond to the size of your company. The reasoning here is quite simple.

Let’s say you ink a deal with a large and renowned investment banking firm: Goldman Sachs. Yet your upcoming business transaction will not be close to the billions. What does this mean? The team that leads your transaction will not be Goldman Sachs’ A-team. In fact, it probably won’t be their B-team either.

Naturally, a large firm is going to save their top players for deals of the greatest value. If you don’t fall under that category, but you still go with a large firm, you are likely to end up less than satisfied at the end of your transaction.

Importantly however, the inverse is also true. If you opt to work with a smaller firm, and your deal’s value is one of the largest they’re working with, you’re more likely to get the best personnel they can offer. In this case, a smaller firm has additional benefits as well.

For example, firms with a reputation in a local area will work hard to maintain or even increase that reputation. In many cases, they’ll place an added priority on deals within their local community.

In addition, a local banker means you’ll have an advisor in fairly close proximity. There are notable benefits here. In-person meetings can be facilitated easily, which will come in handy for a number of reasons. Throughout your deal, problems are likely to arise, requiring effective communication between you and your investment banker to solve. Despite today’s technological advancements, there’s no better form of communication than in-person meetings.

It’s important to remember that these advantages of a local firm especially apply to deals with a value on the lower end of the spectrum. Typically, ‘lower end’ applies to an enterprise value below $100 million. However, if your deal happens to be on the larger end of the value scale, there a number of benefits to working with a big firm.

So long as your deal is one of the largest your firm is working on, you should get one of the top investment banking experts in your industry or particular niche. That alone — considering the experience that comes with it — should set you up for a successful deal. Business transactions always run into problems. But a larger, established firm will have a network of experienced bankers to leverage for support.

All in all, the size of an investment banking firm should be one of the first aspects you examine. Ensuring you select a firm with a size that is comparable to your company and the anticipated value of your upcoming deal is a crucial step in finding the right banker.

2. Make sure your banker has the right experience for your deal

The firm you choose — and the banker who leads your deal — both need to have experience with deals and companies similar to your size, but in your industry as well. In fact, they should know certain aspects about your industry, beyond buying and selling, which even you don’t know. More specifically, the banker who leads your deal should have experience as close to your niche as possible.

Your banker’s experience matters because they’ll know who to target as potential buyers. They’ll know the opportune buyer type (financial, strategic, or individual), the best tax structure for your deal, and they might even know a few potentially interested buyers who are browsing the market.

Bankers with the right experience will also know how to market your sale. They’ll understand the criteria that potential buyers in your industry look for, and they’ll be able to see what differentiates your company from others in the market. It’s precisely this type of expertise which is so valuable, as it’ll likely be unfamiliar to you.

If your banker is knowledgeable when it comes to business transactions in your industry, he or she will be able to identify unfavorable requests from prospective buyers. Their experience will allow for demands that are not the norm to be spotted easily. If they have such capabilities, it can actually indicate to the potential buyer that you’re 100% serious when it comes to finalizing a deal, which is a good impression to make.

Thus far we’ve seen the general value that finding the right banker — in terms of both size and experience — can bring. In order to determine whether or not a potential banker does indeed have the right experience, you’ll have to ask the right questions.

Past deals can provide valuable insights when it comes to the know-how of any firm or individual banker. It’s a common practice to look at similar business deals within the past 4-5 years.

During your reviews, there are several aspects which deserve special attention. First, look at the value of recent deals. Are they similar to the anticipated value of your deal? Deals that differ drastically in value will face different obstacles and intricacies.

You should also take a look at the industry expertise of recent deals. How close were they to your particular niche? The closer they are, the more business contacts and potential buyers your banker will already know — right from the start.

Another important aspect, which is frequently overlooked, is the role played by your banker in past deals. Was he or she the leader of previous deals or just part of a supporting element? A capable banker who has steered deals in the past will have a greater comprehension of the overall procedure, giving you a better chance to maximize your deal.

You should also look at how busy your banker is, and how many deals they typically handle at once. If a banker somehow juggles five deals simultaneously, they probably won’t make yours a priority, giving it less than the attention it deserves.

During meetings with potential bankers, don’t be afraid to open up and look for authentic chemistry; you’re going to need it. Even early on, it’s important to get an idea of how a potential banker will fill his or her role throughout your deal. Learn about what the banker thinks about your business, its industry, and the banker’s potential role in marketing and advising your sale. Your relationship will not be a distant one — you need to be sure your vision, work ethic, company culture, and expected outcome can align.

Once you get to know a banker, what do you think they’ll do when your business transaction faces some turbulence, or can’t seem to locate the right buyer? Will they keep working hard for you, or jump ship? You want a banker who is motivated, hungry, unwilling to settle, and makes you feel as though your deal is their most important deal. It’s a good idea to talk to other executives that the banker has worked with in the past. Your banker’s track record — coming directly from previous clientele — will say a lot about them.

3. Cost – Structure your fees intelligently

Costs for an investment banker will usually have an up-front fee, typically ranging between $50,000 to $100,000, depending on the anticipated value of a deal. In addition to this, there will normally be a percentage involved, commonly ranging between 1% to 2% of the deal’s final value.

As you can see, hiring an investment banker is an investment in and of itself. There are ways you can try to maximize this investment — just as you would to any other investment.

Try to establish a deal that incentivizes your banker to work relentlessly in maximizing your deal, while also minimizing your own financial risk. Naturally, a good route is minimizing your initial up-front costs and compensating with a higher percentage of the deal. You pay a lesser amount up-front and your banker is motivated to earn a higher paycheck by ultimately bringing both of you more money at the end of the day.

Some investment bankers will even entertain creative offers. A deal could feature a low-end fee which is calculated in the anticipation of the company selling at the low end of its expected price range. Then, for every 15% above that price, the banker receives a small percentage of the overall sale price. In this case, your banker has significant motivation to maximize your deal.

Of course, you’ll have to reach an agreement here with your banker based on what you both think is fair. However, the point is this: the fee structure of your deal is a clear opportunity to provide a financial incentive and align both of your motivations in maximizing your upcoming transaction.

Closing thoughts: Bigger isn’t always better

The most important criteria in selecting an investment banker include relevant size, experience, and chemistry. Don’t jump the gun with a big name — a popular name won’t find the right deal by itself. Remember, you need a banker who won’t just close a deal, but who will work hard to find the right deal.

In order to achieve this, you need a banker with the appropriate experience from a correspondingly sized firm. But don’t look past the chemistry aspect, either.

Your relationship with an investment banker should be at the level of a marital commitment. Once you’re committed, turning back becomes very expensive in most cases. Beyond size and experience, you need to be sure they have the business skills, negotiating prowess, and forward-thinking ability to find the right deal.

As we’ve seen, selecting an investment banker is no small task; no significant investment is. Be patient and use the points discussed here to find the right banker for your deal. The difference could be huge.

Further reading: Unsure about when the best time is to sell a business? Review our guide on knowing when to sell for some key considerations.

About Author

Tim Fries Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim is also the co-founder of Protective Technologies Capital (protechcap.com).