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By Chris Younger
Selling a business is a complex process and most business owners, particularly those who have never been through a business sale, should not “self-medicate.” Your business is likely your most valuable asset and a big piece of your net worth—you want to maximize its value.
Educate yourself, talk with other business owners who have successfully sold a company, read articles, and talk with your advisors. This process is complicated, expensive, time-consuming, and at times exhausting. Don’t go into it unarmed or unaware of what you are about to experience.
Business owners looking to sell their business, or who have received an unsolicited offer to buy their business, face an important decision: When do I need to hire an advisor and how do I pick the right one? The first step in selecting an advisor is to determine what type of advisor you need. Smaller businesses (with values less than $10 million) will likely be better served by a business broker, while larger businesses will be served best by an investment bank.
But how do you find the right investment bank?
Referrals from other business owners, advisors, attorneys, and accountants are a good start, but don’t stop there. Do your own research. You want to find an investment bank that is best suited to your specific requirements and that will do the best job for you.
When talking with prospective investment bankers, what questions should you ask? You should thoroughly review their expertise, experience, references, and credentials. You will be working side-by-side with them throughout an emotionally draining process, so make sure you feel comfortable with them as individuals. A good sense of humor is always a plus, as things can get tense!
Here are some key questions to ask investment bankers to help you evaluate an investment bank and ensure it will be a great fit for you and your company:
10 questions to ask investment bankers when selling your business
1. I see on your website you closed [name 4-6 transactions you find on their website]. Could I speak with them about their experience with your firm?
Talking with the firm’s references is a critical step in your evaluation process, but you don’t want to speak with the firm’s cherry-picked list of references. You want to make sure you are getting a representative sample. By selecting companies from their website’s list of closed transactions, you reduce the odds that you will only be talking with their happiest clients.
When you talk with their references, dig deep and ask a lot of questions—not only about the firm, but about their experience in general. This is a great way to learn and prepare for what you are going to experience.
2. Describe how you would safeguard confidentiality throughout your entire process.
Confidentiality is paramount. Most quality firms will have a very detailed, well-defined process for protecting the confidentiality of your company and the selling process. If the firm ever mentions that they post your transaction on a website (whether their own or someone else’s), run. This is the fastest way for the market to know your company is for sale, which will create problems for you with your employees, customers, and suppliers.
Also, ask them how they would handle the situation in which there has been a breach of confidentiality. The best firms will coach you ahead of time about how to handle the surprise phone call from a customer or visit from one of your employees.
3. What is the typical size of transactions on which your firm advises?
You want a firm for which your transaction size is suitable. If a firm’s average transaction size is much smaller than the expected value of your company, they may not have the sophistication to manage the complexities of your process.
On the other hand, if the firm’s average transaction size is much larger than the value of your company, you may get delegated to the firm’s junior personnel and they may not be equipped to target the right types of investors and buyers. This means you could miss out on finding the best deal for your company.
4. What experience does your firm have in my industry?
In this list of questions to ask investment bankers, this one is a tricky one. Many business owners feel they need an “industry expert” who knows all the buyers in their industry. Most investment bankers, however, who represent a quality business will have no trouble getting access to all of the right industry buyers.
While a dedicated industry focus can be helpful, industry experts can have potential conflicts of interest. If they are selling to the same group of buyers for every deal, they may be more interested in protecting those relationships than zealously advocating for you, and in some cases they might be doing buy-side work for the very same buyers.
More articles from AllBusiness.com:
- A Guide to Succeeding in Business Negotiations
- What Do Bankers Look for in a Business Plan?
- Selling Your Business? 10 Tips to Keep in Mind Before Announcing the News to Employees
- What Factors Should I Consider When Choosing a Business Bank?
- Selling Your Business? 7 Steps to Boost Its Value
Industry experts also tend to target the same limited group of buyers for every deal, which means they could miss out on the opportunity to find an outlier bid for your business from someone who is not on the list of “usual suspects” for your industry. Finally, industry experts might put you into their standard “box” and end up missing out on the opportunity to tell your company’s unique story.
Having some experience in or around your industry can be helpful to make sure the investment bank can get up to speed quickly on your business, but be careful with investment bankers who only do deals in your space.
5. Describe the process by which you intend to market our business.
Good investment banks will have a well-defined process by which they will take your company to market. This should involve getting a detailed understanding of your business, setting up a data room to prepare for due diligence, developing a compelling story about your company, building a customized prospective buyer list, and having a willingness to roll up their sleeves and drive the process from letter of intent to closing.
By asking several candidates about their processes, you will learn quite a bit and will be able to see which bank has the most comprehensive process.
6. How would you value our business?
This one is also tricky. Be aware of investment banks that give you a valuation that is much higher than the other investment banks are providing. Some investment banks will give you an artificially high valuation and tell you how confident they are they can get this higher valuation. This is intended to flatter you—don’t fall into this trap.
The best investment banks are going to give you the range of offers they honestly expect you will see, and then they will try to exceed those initial estimates (versus giving you unrealistic expectations and then disappointing you). Always ask references whether the investment bank exceeded their initial valuation expectations.
7. Please provide names, resumes, backgrounds, and specific experience and specific roles of the personnel from your firm who will represent us.
Here you will want to learn the typical level of involvement at each stage of the acquisition process for each person participating in the process. You want to know with whom you will be working—who will be performing which tasks at which stages of the process.
You don’t want the most senior person doing due diligence or building your financial model, but you do want them on key bidder calls, in your preparation for management meetings, and actively involved building your story. It is particularly true of larger firms that there can be a “bait and switch”—where the senior person sells you and then disappears after the deal is executed.
8. What percentage of the clients you sign up actually close deals?
You should ask this question of investment bankers to make sure that the firm closes a high percentage of deals they take on—ideally, higher than 80%. There are a few firms in the M&A market today who employ high-pressure sales tactics during seminars, take a hefty fee up front (often in excess of $50,000), but then rely simply on mailers to their standard buyer database to sell their clients, only to see businesses sit on the market for two or three years or more.
These firms will often have punitive cancellation provisions and rely in large part on their up-front fees to earn their revenues versus a success-based fee, which is paid when you receive your consideration. It is much better if most of their fees are based on a successful transaction so that your interests and theirs are in perfect alignment.
9. Are you a registered broker-dealer?
Avoid hiring a firm that is not its own broker-dealer. A broker-dealer is registered with FINRA (Financial Industry Regulatory Authority) and is authorized to take commissions on securities transactions. If a firm is not a registered broker-dealer and they get paid a commission on your transaction, it can pose risks for both parties in the transaction and for the viability of the transaction itself.
In addition, the fact that an investment bank has gone to the trouble to become its own registered broker-dealer is a sign that they take their client obligations seriously and have disciplined internal controls.
10. How do you get paid?
The best banks will charge a monthly retainer of $10,000 to $25,000, as well as charge a “success” fee. Some smaller firms may not charge a retainer, but in this case you will likely get what you pay for. The success fee will typically be a percentage of the overall transaction proceeds, and can range from 1 to 10%, depending on the size of the transaction. (A $20 million deal might have a fee in the 3 to 5% range, whereas a $100 million deal might have a fee in the 1.5 to 3% range.) Many companies prefer that there is an incentive for the investment bank to deliver above-market results, which would mean the percentage commission goes up as valuation increases.
Some firms have a “minimum fee.” Try to avoid these so that you do not find yourself in the position of paying an above-market fee if your deal ends up being smaller than expected.
Finally, your fees should only be due to the investment bank when and if you receive cash proceeds. Some banks insist their fees be paid up front on the total deal value, even if you have to wait for an escrow, earnout, note, or equity interest to be paid out later. This misaligns your interests with the investment bank’s interests, which can create problems for you.
Knowing which questions to ask investment bankers helps you choose the right one
Selecting the right investment bank is important, and knowing which questions to ask investment bankers can help you make the right decision. Make sure to spend the time finding the right investment banking candidates and do your due diligence. It will help you maximize the value of your business and ensure a smooth transaction process.
The views expressed represent the opinion of Class VI Partners. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. Class VI is a registered broker dealer, Member FINRA.