If you are considering selling your company, your primary objective will be to obtain the highest possible value. If you have never sold a company before or are unfamiliar with the process, you may not fully comprehend the role of investment bankers and the value they bring. We will highlight the primary responsibilities of an investment banker and explain how they can potentially help maximize the sales price of your company.
Studies
Many studies have shown that hiring an investment bank can yield a significantly higher return than completing a transaction on your own. A study published by Harvard Law, which analyzed 4,468 transactions over a period of 20 years, found that sellers who hired an investment bank received an average valuation premium of around 25 percent. In addition, the study revealed that nearly 99% of businesses sold by sophisticated institutional sellers, such as private equity firms, were represented by an investment bank.
Furthermore, Northern Trust’s Business Advisory Services group performed an analysis of thousands of transactions and discovered that companies that engaged an investment bank received an average EBITDA multiple that was 1.5 times higher than those that did not.
In another study, Fairfield University conducted a survey of 85 business owners who had sold their businesses for amounts ranging from $10 million to $250 million. Out of these 85 business owners, 84% were able to sell their businesses for a price that met or exceeded the investment bank’s target valuation.
Based on our experience, these premiums can be even higher for smaller businesses. In such cases, the guidance and network of an investment bank can have a significant impact on the sales process.
Expertise is Valuable
While business owners are experts in their respective industries, investment bankers are experts in selling and advising companies on financial matters. Selling a business can be an extremely complex and daunting process to navigate alone. For many business owners, this is the most significant financial decision they will ever make, and they may only have one opportunity to do so. Investment banks can help minimize the stress and anxiety that come with a decision of this magnitude.
Aside from obtaining the highest price and best terms possible, there are several additional advantages to working with an experienced advisor:
- Access to a vast network of interested buyers. While business owners may have a few potential buyers in mind, investment bankers have established relationships with hundreds of institutional investors, such as private equity firms, as well as strategic buyers across numerous industries. The goal is to not only find the group that will pay the highest price but also one that will be the best fit for the company and its employees. This may require reaching out to dozens if not hundreds, of groups and spending numerous hours vetting potential investors.
- Staying focused on the business. Selling a business requires a significant amount of time and resources, and it can be a major distraction from the company’s day-to-day operations. One crucial thing a seller would want to avoid is a decline in the quality of their business during the selling process. This can make the business less attractive to potential buyers and ultimately reduce its value. An investment bank performs the majority of the work on behalf of the sellers, only involving them in the process when necessary.
- Better terms. There are a wide variety of structures and terms for buying and selling companies, and an investment bank can help negotiate the best deal terms to fit the seller’s needs. Investment bankers understand the nuances of many different types of structures, which can be helpful in achieving the seller’s goals and objectives.
- Increased likelihood of a successful closing. Deals can fall apart for a variety of reasons, such as market conditions, sudden drops in business performance, or impasses between parties. The last thing a business owner wants is for a deal to fall apart after spending a significant amount of money on accounting and legal fees, not to mention the time invested in the process. An advisor can help mitigate these risks by having one or more backup offers and interested parties still at the table. They provide a level of expertise and experience that is necessary for navigating complex issues like due diligence, negotiating terms and prices, and managing expectations between the buyer and seller.
Presenting the Opportunity Correctly
For many business owners, working with private equity firms and other institutions is uncharted territory. Investment bankers are fluent in the language of finance and understand how investors prefer to receive information. They are also well-versed in identifying promising investment opportunities and can recognize factors that may deter potential buyers. An investment banker plays a crucial role in providing buyers with all the necessary information to evaluate an opportunity efficiently. Given that buyers receive numerous opportunities, it is essential to present the deal effectively to avoid the risk of it being overlooked.
Managing the Process
What an investment banker does requires a significant amount of coordination, communication, and attention to detail. Results come from implementing a tight and methodical process. Before bringing a company to market, an investment banker conducts due diligence to ensure a comprehensive understanding of its operations, market position, and financials. Through this process, the advisor will be able to anticipate specific questions from buyers and gather and organize all the necessary information to answer them in a data room. They will use this information to prepare a compelling CIM that tells the story of the company, highlighting its key strengths and potential for growth.
Once the marketing materials are completed, bankers often spend over 100 hours vetting potential buyers via email, phone calls, and meetings. They also manage the NDA process with interested parties. They will then require each prospective buyer to adhere to a strict timeline for submitting bids on specific dates while also controlling the flow of information. Utilizing a two-step bidding process helps to ensure that potential buyers present their best offers while also creating competitive tension. Throughout the process, the team will keep the seller informed at every step and work with them to guarantee that the deal terms and structure align with their goals.
Maximizing Competitive Tension
When selling a business, the seller wants to maintain control of the process from beginning to end. We frequently hear about business owners who go at it alone, only to be bullied by buyers and end up accepting inferior terms due to sunk costs and deal fatigue. Hiring an investment bank to manage the sales process adds credibility to the seller and signals to prospective buyers that they need to behave appropriately. It also indicates that they will be competing with other groups for the business, which can increase the likelihood of a successful sale. Moreover, engaging an investment bank conveys a strong message that the owner is committed to completing the sale. Bankers will ensure that each buyer follows a specific timeline, thereby maintaining competitive tension throughout the process and ultimately increasing the likelihood of a successful sale on terms that are advantageous to the seller.
Negotiation & Pushing to Close
Investment bankers will take the lead in negotiating to make sure that the seller can maintain a strong relationship with the buyer, who typically becomes a new partner after the transaction. Investment bankers will negotiate the purchase price, terms and conditions, timing, and other major considerations, such as the balance between cash and rollover equity, seller notes, and earnouts. Effective negotiation is more of an art than a science and requires an understanding of what is marketable, what is not, and what is possible to negotiate. As professionals, investment bankers can keep emotions out of negotiations, help sellers understand the trade-offs, and advise on what is reasonable to ask for.
Once a seller has a deal that they are excited about, there is still a lot of work to be done. The buyer’s due diligence process can take anywhere from 45 to 90 days or more. During this time, the seller must ensure that the business continues to operate effectively and be responsive to any requests for information from the buyer. This stage of the process can be stressful and exhausting, but having an investment bank provide support and take on as much of the workload as possible can alleviate the burden. This is the stage where most deals fall apart, and while no process is without challenges, having an advisor on the seller’s side greatly increases the chances of a smooth closing.
Conclusion
After decades of combined experience in selling companies across various industries, we have learned that having a knowledgeable team of advisors can often make the difference in completing a successful sales process. There is a cost associated with hiring an investment bank, which is typically a small percentage of the total transaction if a deal is successful. You should carefully vet the investment bank and feel comfortable with the team and their knowledge, experience, and capabilities before engaging their services. Hiring an investment bank is a worthwhile investment as it helps you navigate and manage a unique and challenging process while creating a competitive investment environment that maximizes your company’s value. This adds significant value to exploring a transaction.
Hiring an experienced investment bank, such as Crewe, to manage the process for you can provide peace of mind that you have explored your options and that you are not leaving anything on the table. Selling a business can be a complex and emotional process. However, it can also be extremely rewarding as you realize the value of your life’s work.
Have Questions?
If you have any questions regarding the process of selling your business or are interested in discussing how Crewe can assist you, please do not hesitate to contact us. Our goal is to provide maximum value and establish a relationship of trust and transparency with our clients.
References
Agrawal, A., Wang, Q., Lian, Q., & Cooper, T. (2014, May 13). Does hiring M&A advisers matter for private sellers?. The Harvard Law School Forum on Corporate Governance. https://corpgov.law.harvard.edu/2014/05/13/does-hiring-ma-advisers-matter-for-private-sellers/
III, D. W. M. (2022, November 21). The ROI of Hiring an Investment Banker. Forbes. https://www.forbes.com/sites/davidwmccombie/2022/11/15/the-roi-of-hiring-an-investment-banker/?sh=2b405a1346ea
McDonald , Michael. B. (2016). The Value of Middle Market Investment Bankers. Fairfield University. https://crewe.com/wp-content/uploads/dlm_uploads/2023/05/The-Value-of-Middle-Market-Investment-Bankers.pdf