Ha! Wipe the coffee off your shirt! I'm serious!
As long-time investors in growth-companies, we're often asked by entrepreneurs about investment bankers. Will they really be helpful in selling the company? I suppose these questions arise due to concerns about the size of investment bankers' fees which are routinely seven figures or greater. For the record, among the many questions we get, this is an easy one to answer. Yes, absolutely, without a doubt, no hesitation... good investment bankers are worth their weight in gold.
Okay, so now you're saying to yourself... what does good mean? Good is obviously a subjective descriptor. If you have an experienced board, they'll understand what this means. But, generally speaking, good means an investment banker with many years of experience dealing with companies of your size, in your industry, trying to accomplish the same type of transaction that you desire. More on how a board can help you with banker selection in a later post... but for now lets just discuss how a good investment banker can be invaluable to you.
With a little bit of study, its easy (in my opinion) to see how an investment banker can add value in a transaction. These are time-consuming, complex, emotion-laden and esoteric processes that often take many months to complete and involve multiple parties that occasionally have differing interests. This isn't selling a car on eBay. Or for-sale-by-owner residential real estate. Hiring someone to help with the process makes good sense from this standpoint. What follows below are the best reasons, in my view, for hiring a good investment banker....
Positioning. As you approach a financial transaction, one of the first questions you should ask yourself is "what's the best way to tell our story?" No one is better at telling your story than you are, right? Well, yes and no. When it comes to selling your company's products to new customers or describing your value-add to industry partners - no one is better than you are at making the pitch. However, your story will need modification before it resonates with the financial- and strategic-buyer communities. Consider a few sample questions along this line of thinking... How does your company fit within the broad sweep of innovation in your industry? What is your total addressable market today and in the future? How are large, incumbent solution providers in your market competing today and how will they respond to the threat you pose? What are the relevant transactions in the industry that suggest how your company should be valued? A good investment banker will have credible answers to each of these questions and help you craft the story to optimize the outcome of the transaction.
Strategy. Every time a company goes to market to be sold, some important strategic decisions are made (explicitly or implicitly) about the structure of the sale process. Is this a broad process targeting many potential buyers? Is this a narrow process where only a few acquirers are approached? Are there certain buyers that should be approached later (or earlier) in the process? Are there emerging buyers from outside the industry that should be included in the process? Perhaps you are in an industry that is dominated by two bitter rivals, one of which is best-positioned to buy you. What process will extract the highest price from that particular strategic buyer? Who are the individuals at these companies that will drive the buying decision? These are important questions, the answers to which are derived from years of experience brokering transactions and building industry relationships. Good investment bankers will have strong opinions about such questions.
Providing discipline. Financial transactions are a lot of work and can be (and often are) a big and dangerous distraction to management teams. Making 20-100 initial outreach phone calls is not uncommon. That's a lot of phone time. Vetting each potential buyer's true interest level is both crucial to a good outcome and often difficult to ascertain. Selecting and organizing the appropriate diligence information in a data room is time consuming. Selling the story takes time (granted, you'll be responsible for this as much as the banker will be) and careful follow up. The challenge is often "herding the cats." How do you do all of the above while maintaining a tight time frame and thereby exerting some control over the process? If one bidder gets ahead of others, you have a problem. How do you handle an early, short-fused bid? If you don't run a disciplined process, chances are you'll figure out the answer to this question the hard way. How do you deliver a tough message to an interested party who just might be your boss in a few months? A good banker handles these challenges for you. Have you ever been surprised by a familiar company being acquired at an extremely high price? Chances are, that deal was preceded by a very disciplined process. Its very, very important.
Getting the deal done. Ok, you've gotten the offer you wanted and you've signed an LOI. The buyer has negotiated for a period of exclusivity during which time due diligence will be completed and documentation finalized. Its kind of scary. What happens if the buyer strings you along and then tries to re-trade a few days before closing (I'll bet you've heard stories about this before)? And what about the preferred shareholders who have the right to block the transaction? What are your ideas to prevent that from happening? Or the troublesome board member who always seems prepared to shortchange management in one way or another? How will you handle that problem? A good banker can help with these challenges by not only providing practical solutions but also a fresh, independent voice. A good banker helps get deals done.
After years of hard work and emotional investment, you'll likely get one shot at selling your company. Don't underestimate the pitfalls of trying to run a process on your own. As an entrepreneur, independence is likely one of your strengths. But in this case, your independence may mislead you. My commentary above, frankly, covers only a small portion of the ways in which a good investment banker is worth a seven-figure fee. Could you feel regret over using an investment banker? Of course. I've felt that way before. But that's not often the case. My recommendation? Find a good banker - you'll be glad you did.
For part 2 on investment bankers, visit here.
Casey West is a growth equity investor at SSM Partners. To learn more about SSM, please visit www.ssmpartners.com.