It took years of effort on your part to build a successful business. Don’t allow the sale of your business to give you a black eye. Investment banking is not a game you learn on the fly. Why hire an investment banker? To maximize the value, you receive in a sale, engage an established investment banker with significant experience in mergers and acquisitions. Even if the sale of your business is years away, it is never too early to begin identifying and researching investment banking firms.
By reviewing this article you will learn about:
1. The critical difference between licensed and non-licensed investment bankers.
2. How a clearly defined sale strategy ensures that you maximize the value and terms you receive.
3. Important criteria to consider when locating the ideal investment banker for the sale of your company.
Don’t allow the mistake of hiring a non-licensed broker to affect your financial future.
Why Hire an Investment Banker
What may have originally been started as an idea or acquisition you transformed into a successful business. To do so you spent long hours working alone to develop innovative ideas to drive sales and growth and your efforts paid off. Although today you have a profitable company, you have come to the realization that in order to enjoy the fruits of your labor it may be time to sell.
Who to Ask???
So, you call the trusted advisors who helped you become successful. You start with your lawyer and after speaking about a possible sale it is obvious that he is knowledgeable as to the process but when you ask him about value, he is clueless.
So, you call your accountant. Who knows better about the value of your business than the accountant who determined your yearly profitability. They understands the financial strength of the company you built. While your accountant lets you know that he too understands the sale process. He has every shred of paper that will be necessary to close the deal. When asked about its value it becomes clear that he knows as much about professionally and effectively valuing your company as your lawyer does.
Let’s face it, your company was built on your blood, sweat, and tears, and simply relying on professionals whose area of expertise is not mergers and acquisitions to value it is like asking a dentist to perform heart surgery. Sure, they know something about the topic, but in general that is not their expertise. So now what?
Seek Out a Pro
Well, maybe it’s time to speak with an investment banker who has closed numerous transactions. One who has his pulse on the market. They cannot only value your company but identify buyers and defend the valuation. Truth is that it took years of effort on your part to build a successful business. To maximize the value you receive in a sale you need someone who has been there before.
History tells us that in these situations, for a seller to maximize their proceeds they need to implement a clearly defined sale strategy that has been developed and honed through years of experience by a securities-licensed professional investment banker who specializes in mergers and acquisitions.
Reality is that an established investment banker with significant experience in mergers and acquisitions acquired that knowledge by successfully concluding a wide variety of actual transactions. And as your banker knows, there is no cookie cutter approach to corporate sales. Conversely, each engagement is a unique opportunity where the strategy being implemented to maximize the outcome is made pursuant to a defined business sale or exit plan. Any other approach injects chance into the process and that means unnecessary risk of loss.
Moreover, in a corporate divestiture there are other considerations that are important to the process. These include confidentiality, the impact of the sale process on ongoing operations, and maintaining financial performance during the sale. For this reason, it is always best to have your investment banker run the transaction while you continue to run your business as profitably as possible.
The Search Begins
Despite rumors to the contrary, investment bankers do not grow on trees.Seek a banker that you can work with effectively. You need to keep in mind that among the most important factors in selecting a professional is their experience with transactions similar in size to your company. This is essential. Individuals who have been focused on smaller or larger companies than yours may not have the appropriate buyer profile appropriate for you.
This raises a critical issue. Is the banker you select have access to all types of buyers in the price range you are selling into? This is important because for a seller to achieve the maximize value for their company, it is essential to manage and create a competitive environment among qualified buyers.
Often this means locating prospective strategic buyers whose operations and products are highly synergistic with yours. In turn, this permits the buyer to provide a more aggressive offer because they will benefit from the increased sales your company may create as well as greater operational efficiencies, which makes the buyer more competitive and profitable.
In addition to identifying, locating, and vetting qualified prospects, investment bankers provide a range of other services. For this reason, other important criteria to assess in selecting an investment banker include:
- Are you confident that the investment banking team will maintain confidentiality and achieve your sale objectives?
- Are they performance-based and will they serve your best interest?
- What transaction price range does the investment banking firm’s area of expertise?
- How many merger and acquisition engagements have exceeded the client´s expected value? How was this accomplished?
- Are the investment bankers that will work on your transaction licensed through FINRA (Financial Industry Regulatory Authority)?
These questions may be regarded as the baseline set of factors for a seller’s due diligence. Assessing an investment banker and getting appropriate answers will provide sellers with a reasonable assurance. It allows them to have identified a well-qualified and suitable investment banker. This is important to handle the engagement in their best interest.
The banker’s merger and acquisition transaction knowledge, together with a targeted marketing plan they develop on your behalf, will help direct the negotiation process by effectively managing buyer expectations. Sellers who make exaggerated claims during the marketing of their companies quickly find out that managing buyer expectations is critical. The more extensive your investment banker’s experience is, the more effective the banker will be at explaining and resolving the problems that will inevitably arise.
Licensed versus Non-licensed Advisors:
There are two primary ways to structure a sale of your company. The transfer/sale of stock; and/or the transfer/sale of assets. In the case of a stock sale, securities in your company will be offered for sale. At closing, they will be purchased by the buyer. In the case of an asset sale, the assets of your company will be offered for sale. At closing, they will be purchased by the buyer. At the beginning of the engagement, there is no way to predict with any accuracy the final structure of the transaction. Moreover, the final structure of a transaction may change during the course of the discussions and negotiations. The final structure of the transaction often is influenced heavily by the advice of the buyer’s and the seller’s respective legal and tax advisors.
Why does any of this matter? Recent issues with regulatory authorities have highlighted the legal requirements of proper licenses. In short, because federal and state laws, rules and regulations require that all persons engaged or to be engaged in the “investment banking” or “securities” business must hold appropriate securities licenses, be associated with a registered securities broker dealer, and be registered with appropriate state and self-regulatory authorities.
You may hear some people say that they are not required to be securities registered or licensed in order to assist you in a particular transaction. But beware: the involvement of unlicensed intermediaries/participants in the sale of your company can be disastrous. Such intermediaries/participants typically are called or referred to in a variety of ways, including “M & A Brokers”, “Business Brokers”, “Finders” and “Investment Bankers.”
The disastrous consequences resulting from the involvement of unlicensed intermediaries/participants vary. It can involve rescission (voiding or undoing) of the transaction. This includes the award of interest and attorney’s fees (rescission effectively gives the buyer the ability to “put” the company back to the seller). Regulatory and other legal actions by the United States Securities and Exchange Commission (SEC). Regulatory and other legal actions by individual state securities authorities. Self-regulatory actions by the Financial Industry Regulatory Authority (FINRA). Last but not least, civil lawsuits.
According to FINRA, an individual must register with FINRA as a Limited Representative – Investment Banking (i.e., pass an examination to obtain the Series 79 securities license) “if such person’s activities involve:
- Advising on or facilitating debt or equity securities offerings through a private placement or a public offering. Including but not limited to origination, underwriting, marketing, structuring, syndication, and pricing of such securities. Managing the allocation and stabilization activities of such offerings.
- Advising on or facilitating mergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations. Or business combination transactions, including but not limited to rendering a fairness, solvency, or similar opinion.”
Please note how Paragraph (B) covers the ways in which a company sale might be structured, including “asset sales”. FINRA or state licenses/registrations other than the Series 79 also may be required, depending on the particular activities to be undertaken by the individuals involved in the transaction.
Please consult with your own attorneys and make your own decisions. But our advice is that in the sale of your company you should work only with experienced, ethical, and licensed/registered investment banking and other securities professionals.
National or Regional Firm
As with most things, sellers have options and can pick and choose who they prefer to work with. Perhaps one determining factor is whether it is better to work with a regional or national investment banking firm and the answer is that it depends on the size and complexity of the engagement.
For transactions in excess of $100 million, a national firm may offer benefits through increased market penetration among prospective buyers.
The larger the transaction, the more moving parts there are and the more resources that are required to organize and conduct a national and international marketing campaign.
Also, in these companies, transactions that are smaller than $100 million are typically assigned to junior staff members. Less senior partner attention is given. However, for mid-market companies where the transaction value is less than $100 million. A regional investment banking firm is likely to be the better choice and the reason is simple. These firms have in-depth experience presenting, marketing, and closing corporate sales. They have a wider range of potential acquirers such as strategic, opportunistic, institutional, and financial buyers. Generally they have senior advisors with extensive experience manage the assignment. IB’s also provide personal service so that the seller is more effectively represented in the process.
In addition, the principals of a boutique firm may have more years of experience personally completing similar deals than the partners at a larger firm. A boutique firm is also likely to represent your best interests through multiple channels of communication with all parties involved. They will be attentive to your requests and keep you better informed throughout the business sale process.
By using these criteria to evaluate prospective investment bankers. Business owner seeking to sell can select a suitable professional that meets the needs of their particular situation. This in turn helps avoid the pitfalls that are inherent in the sale process. At the same time, position you to maximize the outcome. The truth is that the sale of your company is simply another business situation. Where effective and thorough homework pays off.