Selecting an investment banker is arguably the most critical decision shareholders make when deciding to sell their business. The right advisor can increase the probability of achieving a successful exit, while the wrong advisor can lead to frustration and missed opportunities. The decision can be a stressful one, especially considering most shareholders find themselves in unchartered waters when selling their business. How do they know what questions to ask? What factors are most critical to assess when choosing an investment banker? We’ve aggregated the following list of eight tips to follow when selecting an M&A advisor:
Don’t Select a Banker That Promises the Moon and Stars
If it sounds too good to be true, it probably is. Some investment bankers will do what it takes to win the “exclusive” sell-side banker title. One common tactic is presenting an aggressive (high) valuation to the selling shareholder to get them excited and convince the potential client to select their company. Be leery of this approach as the market will ultimately determine the value of the business. It is more important for sellers to understand the banker’s strategies and capabilities to achieve above-market value and terms.
Request Performance Metrics
Sellers should hire a banker with a proven track record. Some metrics to consider include the number of transactions closed, deal closure rate, average EBITDA multiple achieved, average closing valuation compared to preliminary value estimate, average time from launch to closing, and average net working capital adjustment post-closing. The data should be requested for transactions over each of the prior three years. Armed with this data, shareholders can make a more informed and confident decision about the team they are hiring to execute their transaction.
Ask for References
References from past clients are a great way to get a first-hand account of a banker’s performance. Questions focused on (i) validating the banker’s capabilities, (ii) understanding how they handle unexpected situations, and (iii) vetting their negotiating prowess and creativity are valuable to the overall selection process.
Build a Relationship
Successful investment bankers work to build relationships with their clients. Shareholders that reciprocate the effort will reap the benefits of a more productive relationship that promotes healthy and active dialogue, as well as mutual trust with the advisor.
Validate Industry Expertise
A banker who possesses industry experience eliminates the learning curve and brings relevant relationships and insights to a deal. The result is proactive positioning and risk mitigation. Additionally, investment bankers with deep industry expertise spend more time on value-determinative process steps.
Confirm Senior Bankers Lead the Deal
Investment banking firms typically staff each engagement with four investment bankers, comprised of a Managing Director, Vice President, Associate, and Analyst. Firms that lead with senior bankers throughout the process (i.e., Managing Directors and Vice Presidents) are better equipped to handle unexpected situations. Sellers should validate who will lead each phase of the process when selecting an investment banker and look out for the common “bait and switch” that often happens once an investment banking firm is retained. This is where prior client references can be helpful.
Don’t Be Fee Sensitive
Most reputable investment banks price their services within a standard fee range, which varies based on deal size. While some negotiation may be welcome, most investment banks retain strict fee guidelines. This is on purpose – investment bankers are only paid if the deal closes, which makes them fully aligned with their clients to maximize price and terms. Additionally, sale processes require significant time and resources to secure the desired closing outcomes. “Discount” bankers usually lack resources and team depth, or have excess capacity.
Trust Your Process
The above tips are geared towards selecting the investment banker with the right experience and track record to increase the probability of securing a successful exit. By applying these processes, shareholders will be better equipped to select the investment banker that best fits their situation.