In December of 2016, I argued in a post (see here) that good investment bankers are worth their weight in gold during a company sale process. In that post, I posited that a good banker adds value by (i) intelligently positioning the company in both a financial and industry context, (ii) setting the strategy for a successful and value-maximizing transaction, (iii) providing discipline during the process and, perhaps most importantly, (iv) getting the deal done. In this post, I'll take this topic a little further. More specifically, we'll explore how to select the best investment banker for your business.
Okay... you've been the CEO of ACME Software for several years and you and your board feel, for any number of reasons, that it's time to sell the business. The board has asked you to invite several investment bankers to present to them. You've met some bankers in recent years and a couple of them have persistently pursued a dialogue with you. You believe you know who to invite - but you're not sure what to ask them or how to select the one that will best represent you during a sale. Hmmm. Your gut tells you to be careful with this decision... what to do?
Here's my framework for thinking about this:
Specific market knowledge. In order to credibly tell your story to the buyer audience, a banker has to understand the pressures that all market participants face. How is ACME differentiated in the marketplace? Who are ACME's strongest competitors? Has she banked companies similar to ACME? Does he understand why ACME is more or less attractive than comparable companies? In most markets there are a handful of industry consolidators who drive M&A activity. How well does the banker know those businesses and their decision makers? Does he understand where their product gaps are? Does she know their negotiation styles? Has he sold businesses to them in the past? Does she know the details of the most recent transactions these buyers have closed? Or perhaps the details of acquisitions for which they were outbid by another buyer? Or, perhaps private equity buyers will take an interest in ACME. He should know whether that is the case and who the most likely private equity buyers are. You've got to feel comfortable that she can field any one of the above questions confidently and with solid data. You should view specific market knowledge as "table stakes". The "right" banker will proactively discuss the above topics with you and give you confidence that she can tell the story better than anyone.
Technical competency. Much of technical competency boils down to transaction experience and process discipline. Has the lead banker been through a dozen transactions or hundreds? What percentage of the banker's engagements close (versus stall)? Does he have an intuitive grasp of how to run your process? Will she be able to push back, forcefully if necessary, on pushy bidders who try to preempt the process? Who will be making the initial calls to bidders? Who will assist you in formulating the buyer list? The senior banker or perhaps someone more junior? How strong is the team under the senior banker? How long has the team worked together? In the area of technical competency, reference calls can really pay off. Ask other CEO's whether they were satisfied with the involvement and responsiveness of the senior bankers with whom they worked. Ask if the bankers ran a disciplined process where the bulk of early communication was handled by the bankers (and not management). Importantly, a banker with specific market knowledge is not necessarily technically competent as well. Kick the tires in this area.
Fit. This is make or break. Fit is about alignment. Is the banker under consideration likely to view ACME's sale as "important" and "core" to their business? Let's say that after listening to several bankers pitch the board, the combined group has outlined a valuation range of $110 million to $190 million with a mid-point at $150 million. You really like the last banker that presented because her specific market knowledge was fantastic. However, one of your board members asked her the size of her bank's average M&A transaction and she responded with "around $500 million." Bad answer. Banks, just like any other business, have cost structures that require a certain amount of revenue to keep the lights on. Selecting an "up market" bank comes with both increased cost and risk. Cost because this bank will invariably require higher fees commensurate with their larger average transaction size and risk because if at any point in time they become engaged on a significantly larger transaction you will see and feel reduced senior-level attentiveness. Believe me, no matter how compelling his specific market knowledge is, if fit is way off, you've got to be extremely careful. I've been on the wrong side of this equation and it really sucks.
Sell, baby, sell! Investment banking is basically a highly-lucrative, intellectually stimulating sales job for smart, competitive people. It's like a real-life chess game with huge spoils to the victor. Fun stuff that is probably less glamorous than its sounds (just like my job) but pretty cool nevertheless. So why do you care? Because the operative word here is sales. Oddly enough, even sophisticated boards can lose sight of the importance of a banker's ability to sell the story. Whether buying a new car for $50,000 or a company for $200 million, people want to be sold. You've got to ask yourself, if this banker called me on the phone and in two minutes laid out the ACME story, would I bite? There are a lot of smart folks in the investment banking industry, but only a few of them can really sell. If I had to pick between smart and salesy, I'd pick salesy. I want a closer working for us. Ideally, however, you find a person or a team that can deliver both smart and salesy. Don't let the fancy pedigrees distract you from this very important fundamental.
Valuation. So, what does the banker think ACME is really worth? In my view, you've got to guard against the common trap of selecting the banker that promises the highest value. Ultimately, as I've seen many times throughout my career, the market will place a value on ACME regardless of what any of us think it's worth (maybe your realtor has told you this about your home?). The banker's job is to run a competent, disciplined process and drive the best bidders to the limits of their willingness to pay. However, the way a banker both views and values ACME does matter as it impacts the manner in which she justifies and encourages higher bids. In many respects, valuation is derived from specific market knowledge, technical competency and sales ability. If a certain banker pitches us that ACME is worth a premium valuation, I want to feel that the banker can both "see" and "sell" it with the right narrative and analysis. Ultimately, you're hiring the investment banker to maximize value, right?
Putting ACME in the hands of the "right" investment banker is a really, really important concept. A misstep here may cost shareholders and employees millions of dollars. Be prepared for the selection process and ask good questions. It could make a world of difference in the outcome of your sale.
About SSM Partners. SSM has partnered with talented entrepreneurs for more than 25 years. The growth equity firm invests in rapidly growing companies that have proven and differentiated software, technology, or healthcare business models. Starting with a relationship built on trust, SSM offers its entrepreneur-partners a thorough understanding of the growth company lifecycle and a collaborative approach to building great businesses. Learn more at www.ssmpartners.com.