Several of the companies I work with have gone to market with investment bankers in the last few months, and over the course of my career, I have participated in a number of transactions that were managed by investment bankers. There are a lot of quality, smart people in investment banking, but it is really rare to hear a CEO or investor gushing praise on their most recent banker experience.
In the private company tech world, there is a basic pricing structure that every banker adopts with some modifications. For the most part, CEOs and boards uniformly question why the cost is so high, so it is important to know what you are paying for and what to expect. The typical deal has an upfront component and a minimum fee for any transaction, with an escalating fee based on the size of the transaction. The escalators typically reflect successful negotiation of a purchase price greater than what the banker estimated the company’s value to be when the deal was signed. Fees are based on a percentage of the transaction price, and are generally a few percentage points with a floor and no ceiling.
Most firms assign a lead banker, and a small team of junior folks to work on the deal. They are often working on more than one deal at a time. Start to finish, the process is typically about six months, with some phases much more active than others.
The process is pretty cookie cutter, but what differentiates bankers is their industry knowledge, their network, and how they stay in touch with acquisitive companies and active financial investors. An informed banker will have an awareness of who might be interested in a given industry or company, and they use their interactions to build credibility for when they have a company to present. This industry knowledge is a key criteria for a seller when selecting a banker. Most bankers send out their initial teasers to a wide group of potential buyers, which one executive described as “spray and pray.” Even though the banker and the seller might have predicted the interested potential buyers at the start, there are often surprises that get caught in the broad net.
From as many as one hundred or more contacts, the process quickly winnows down to a few interested parties. This is where the banker is supposed to shine. For the seller, a good banker will fully understand their business and the key value proposition that matches each interested buyer. In other words, a good banker will present the seller in the best possible light for each unique buyer, and be adept at objection handling. A not so good banker presents numbers and canned value points with little strategic understanding, and will often fail to build buyer enthusiasm. As with most roles, there is a wide spectrum of capability and professionalism among bankers. There are dedicated great bankers, and there are some that just “phone it in.”
Here are a few guidelines for selecting a banker:
The Inside Track - Focus on bankers who have demonstrated knowledge and involvement in your industry. They probably reached out to you in the past to begin to build rapport and awareness of your business, and you see them at conferences, or you hear about them representing related companies in their sale process. You want an insider.
Sweet Spot - Find bankers that typically do transactions with similar sized companies to yours, and with outcomes similar to what you expect. Even if you catch the eye of a large scale banker, if your deal is considered small, you will not get the right attention. You want a banker that wants to do your size deal, and is used to working with companies that look and behave like you. Small companies can be volatile with good and bad months throughout the process. You need a banker that can roll with the business, and is not expecting public company steady performance from a small private seller.
Who’s On First - Clearly establish the roles and responsibilities of the banker’s team, and what is expected of your team. Who will create the marketing materials, who will manage the numbers, who will make the calls. Management has a business to run throughout the sale process, so you want to find a banker that you trust to carry most of the load. Ask to see examples of their work products. Creating the Confidential Information Memorandum (CIM) is a tedious process, and it is critical to get it right. Do not accept a cookie cutter approach that just plugs your words and numbers into a template. Take time to discuss the process with prospective bankers. Most importantly, understand who exactly will make what calls. Will the senior banker be the only person to speak to prospective buyers, or will junior staff will be making some of the calls. Think of the senior banker as your sales person; you want them committed to be front and center on every call.
The MVP - You are hiring a firm and a team, but the lead banker is the star you want to focus on. Rapport with the CEO and the board matters. You will be spending a ton of time with the lead, so make sure there is a positive vibe to the relationship. Consider if this person is someone you would buy from? Will they represent your company in a manner consistent with your values and culture? How will they manage their team, and will they take full responsibility for all materials and contacts? How enthusiastic are they about your business? In the initial meetings, can they tell you why someone should want to buy your company, and do you agree with them? Check out their reputation in the industry, and ask for references.
The Process - Clearly map out the process and the metrics to expect at each stage. Some bankers prefer targeted marketing campaigns, while others will cast a wide net. Some will only focus on domestic buyers, while others will have international reach. Ask for their timeline and their success criteria for each step. Make sure you believe the timeline is possible.
The Fee - Negotiate hard. Pay attention to the details of the engagement letter. If there is an upfront fee, make sure it it is credited to the success fee. Do not be generous with the minimum fee, and make sure it applies up to a valuation that you are willing to accept. Escalators should be tied to achieving valuations beyond your expectations. Plan for success, but prepare for failure. Pay attention to the tail of the relationship in the event no deal happens. Negotiate the duration of the tail, and carefully define what criteria will determine if the banker will be paid when a buyer shows up during the tail. If the banker sent the teaser to 100 potentials, but only heard from some, and only engaged with a few, be clear about how the tail applies. They will argue for the entire 100 potentials to be covered. You should argue that there has to be some level of activity that entitles the banker to claim a fee. It is easier to have this conversation up front rather than after a failed process.
Once a banker is selected, they are an insider and part of your team. The CEO should have an open an honest rapport with the banker, sharing good news and bad. With an candid working relationship, the banker can help position bad news and coax buyers to keep moving forward. Never surprise the banker. The CEO also has to hold the banker accountable for the promises made during the selection process. Never forget that the banker works for you, and do not hesitate to demand their attention.
Selecting the right banker or the wrong banker can make all the difference in the outcome of a sale process. For the company, this transaction is everything, for the banker, it can be just one of many. The right banker will understand the importance of their role, and will treat the engagement as their mission.