Using an investment bank to assist with the sale of your middle-market company is often an intelligent idea. Institutional involvement could improve the reputation of your business, attract the attention of previously unconsidered purchasers, drive negotiations, and alleviate the stress on your company. That being said, there is a right and a wrong way to choose a sales partner. Consider the following advice when vetting investment banks to assist with the sale of your middle-market company.
Do: Choose an investment bank that knows your industry
When selling your company, you will want your investment bank to reach out to the broadest group of likely buyers and explain to them why your company is unique and has exceptional value. Having an investment bank that does not understand your industry will require you to educate them on not only your business, but your industry, running the risk that small nuances that cause your company to have exceptional value may not get properly communicated. Most importantly, you want the investment bank to have established relationships with potential buyers where they can leverage those relationship to help you get the best return.
Don’t: Make your decision without considering the size of the bank in relation to the size of your transaction
All investment banks are not equal. As with any deal, you need to select an institution that possesses the necessary resources to properly conduct a transaction of your caliber. Consider the complexity of your transaction, along with the level of personal service you will require over the course of the interaction. Large firms are best-suited to deal with sales that involve multiple, complex moving parts while boutique firms are better at providing high levels of personal interaction. While going with a large firm with a prestigious name may feel great, if you are a small or middle market company, you will not get the first string, you will get the junior team that will likely have less experience than what you will find at a smaller boutique firm.
Do: Choose an investment bank based on the reputations of transaction executors
The investment banker that you will work with is just as important as the company they represent. Scrutinize the number of sales they have conducted, their close rate, the valuations they have been able to get, and their accessibility. All firms can access the necessary information required to conduct a transaction in today’s data-driven environment. The executor’s personal ability to utilize that data to achieve desired outcomes is critical.
Don’t: Forget to discuss how the investment banker will be compensated for their involvement.
Some investment banks accept a small portion of your profit as payment. The sum is referred to as a success fee, and can vary based on the type, size, and details of your particular transaction. Others accept company warrants as payment. Warrants allow the investment bank to purchase stock in the company at any time without requiring that they do so. This practice increases risk for the investment back but decreases the cash cost of your transaction.
Do: Assess how success will be measured and how communication will be handled
It is imperative that you are aware of where your company stands at all times during the sales process. Ask if you will be provided with regular reports outlining time spent on your transaction, work completed, and updates regarding the status of your deal. Be upfront about your expectations and conduct negotiations with a clear understanding of what a successful sale will entail.
Do: Asses what kind of Virtual Data Room tool will be used
During a selling process potential buyers will want to have access to thousands of company files and documents as part of their due diligence process. It is important for a potential selling to understand how this process will be managed by the investment bank and who will be responsible for what in terms of structuring a data room and setting access privileges. Some sites are very good at allowing sellers to customize access for each individual buyer, an important tool if you have buyers at different stages in the process or competitors as potential suitors.
Don’t: Allow the company to be trapped by ironclad contractual agreements
Unfortunately, all the research in the world is sometimes not enough to predict human behavior. Before entering into an agreement with any investment bank, ensure that you will be equipped with a way out in the event that circumstances change or the institutions performance is not up to par.
