Hiring an Investment Bank III: The First Call
This blog is part of the “Hiring an Investment Bank” blog series. For more, visit the previous installment of the series here.
Making the first move can be difficult. You undoubtedly do not have complete clarity on whether to sell your business or go in some other direction. You probably have friends that have traveled this path who you can consult or trusted advisors with experience in mergers and acquisitions. Those are good starting places. Your advisors may have suggestions on investment banks that can help, but that isn’t a substitute for your own investigation. Only you know what is important to you and your team. Take those preferences and search the web for investment banks and see what you find.
The early conversations with any investment bank are typically about helping you understand your strategic options, so every discussion is bound to add depth to your understanding. As an aid to this process, we suggest the following as a guideline for hiring an investment bank:
Undoubtedly, there are several considerations that have you thinking about a sale but take some time to consider all facets. Do you want to sell your business for personal reasons, or do you feel compelled to sell due to changes in your customer base, vendor base or competitive landscape? What strengths and risks do internal issues present for the future of the business? Can you describe the size and growth rate of the market and your niche? Can you describe the strengths and weaknesses of the other industry participants? Also, think about what is important to you in a transaction. What would be an ideal outcome, and what are the “must haves” in a deal versus what would be nice to have?
Don’t be surprised if contemplating this stirs some emotions in you as well as those around you. Selling a business is usually an emotional process. Most entrepreneurs have attachments to the business that cause them dissonance throughout the process, but by knowing your intent, you can quell those voices when they arise by remembering the larger issues at stake.
Another element of the process is thinking about what kind of transaction is best given your intent. In broad terms there are Financial and Strategic buyers. Being purchased by a larger company in a related field or a private equity firm usually brings varying levels of buyer involvement post transaction. In every case, finding a buyer who shares your philosophical beliefs is key to protecting the essence of the business. Selling your business is a lot more like a marriage than a commercial transaction. There must be a shared view of your mission and how you will engage the stakeholders such as employees, customers, suppliers, the community and the environment post-closing.
Banker’s Interest in the Business & Market Knowledge
Once you begin to find clarity around what path you want to pursue, you can question the bankers on why they want to work with you, what it is they see in your company that is attractive as well as what they bring to the table that might be a unique benefit. You want to engage a firm that is excited about your company, its prospects and what it stands for and is trying to accomplish—your mission, vision and values. This is especially true if you are running a company that is driven by a higher purpose than just making money. If you have fears about layoffs or the firm losing its identity, you need to make sure that you are dealing with people that share your values and see your company in the same way you do.
A fair market valuation must be developed to determine the purchase price range you can expect for the company. You don’t have to pay for this. Investment banks will give you an indication of value as part of their marketing process. After you have them sign a nondisclosure agreement (NDA), give them three- to five-years of financial history and your budget for the current year, and they can provide a valuation analysis. It will be a preliminary indication of value as a more nuanced analysis can only be done after the investment bank has completed its due diligence of your company. They’ll usually give you this as well as their supporting materials in a pitch deck articulating why you should hire them.
After you engage an investment bank, they will conduct extensive due diligence around the internal and external risks and opportunities of your business, which are typically presented to buyers in a Confidential Information Memorandum (CIM). The securities laws require that the investment bank conduct due diligence, generally known as the “Know Your Customer” (KYC) requirements, but doing all this and publishing a comprehensive CIM also protects you from liability as well—what is known as 10b-5 liability for material nondisclosure.
Once that is done, you and your banker must decide on the kind of process you want to run. The most common is the Broad Auction because it reaches a lot of potential buyers and therefore is believed to create the most competitive dynamic to drive up the transaction value. This approach has lots of drawbacks as well, so other approaches including a Limited or Targeted Auction, and Exclusive Negotiation should also be considered. This work typically takes four to six weeks while they conduct their due diligence, draft the CIM and develop a list of proposed buyers.
You will want to know the names of the senior and junior staff members that will be working on your deal and the number of deals they are engaged on at that time. This will give you an idea of how thinly stretched they may be. If you have decided that one or two people at the firm are key to the process, you should stipulate their involvement as part of the engagement letter. Some firms bring in the grey hair to get hired and then you’re left with the junior team from there on out.
Knowing what makes one investment bank different from the other is important. This helps you narrow down who you would like to work with. Firms all have different experiences and capabilities. Some may be experts in a certain type of transaction (ESOPs). Others may be experts in your industry and that may give you comfort. Others may better understand your particular circumstance or give you comfort that they share your values and better understand your desired outcome. In any case, don’t forget to ask for referrals from past engagements and see if they’ll let you talk to people involved with deals that didn’t close—every banker has those too.
No one wants to pay more than they should, but in the big picture, the difference in fees is typically not that much and shouldn’t drive your decision. What is more important is that you feel comfortable with the bankers and that they have the experience to run a well-organized process and have a genuine interest in your business and what you are trying to accomplish.
EPOCH Pi is a Certified B Corp and investment bank that serves purpose-driven companies, companies that exist to provide both financial and social returns. Impact companies range from providers of clean technology and sustainable agriculture to old-line manufacturing companies that create meaningful work environments, have positive cultures, and treat suppliers and other stakeholders equitably. Our services range from capital formation for growth companies to generating liquidity for existing shareholders. In every case, one of our criteria is the alignment of our client’s purpose and vision with those of the financial stakeholders. At EPOCH Pi, we have developed a set of unique, proprietary assessment tools that facilitate cultural alignment in mergers and acquisitions. Learn more about our services here.