Many founders feel they need the expertise of an investment banker when it comes time to find a buyer for their business or to raise growth capital. After all, these professionals have extensive experience in shepherding businesses through the sale process and understand how to get the ideal outcome for their clients.
And yet, a surprising number of founders never take the opportunity to reach out to an investment banker, instead working with buyers or investors directly, responding to their email inquiries or meeting requests. This route can save on fees, but it also may limit the options available and the transaction outcome that ultimately is realized.
There are pros and cons to both approaches, and the decision can be a tough one, especially if you’re eager to get moving on your next step. Let’s take a look at some key considerations for founders who are evaluating their options.
The Pros of Working with an Investment Banker
Before we get into the pros of working with an investment banker, it’s important to understand exactly what they do. Investment bankers are tasked with using their analytical and persuasive skills to attract the right buyers and investors for the best possible financial and professional outcome for their clients.
Depending on their experience and skill level, investment bankers bring the following benefits to most transaction types:
Expertise & knowledge:
First and foremost, the right investment banker will know the industry (and your business) inside and out. An experienced investment banker…
- Typically brings deep industry-specific experience and knowledge, allowing them to offer greater value and insights
- Brings deep knowledge of M&A transactions, helping you understand what to expect
- Ensures you’re prepared to go to market (and if not, has the capability to help get your house in order financially and operationally)
- Has the bandwidth and skill to manage the arduous due diligence process, taking the burden off you
- Serves as your trusted advisor and guide through a complex, time-consuming process
Value (beyond just numbers):
You’ve worked long and hard on a business you’re proud of, and you want to maintain the legacy you’ve built. Beyond the numbers, an investment banker…
- Reaches into their own network of potential buyers (both strategic and private equity), enabling them to attract serious offers
- Develops a compelling story that goes beyond facts and figures, tapping into buyer goals and motivations for a better outcome
- Takes the time to understand your vision, helps you articulate your goals, and outlines the best way to achieve them
- Reviews all offers holistically, not just based on the sale price, to ensure the final agreement achieves all your goals
- Maintains an objective, rational view, helping to keep your emotions in check
Manages the process to prevent unfavorable situations:
As you prepare to take your next step, you’re busy managing the day-to-day and don’t have time for the details that result in a positive M&A experience. Your investment banker makes it easy and:
- Negotiates on your behalf, enabling you to maintain a positive relationship with the buyer (critical if you plan to stay on board after the transaction)
- Helps structure the best overall deal and prevents missteps, such as agreeing to work exclusively with one buyer too soon
- Quarterbacks the process, coordinating with the many parties involved (such as a CPA firm, attorney, or technology consultant)
- Frees your time to focus on running the business and keeping company performance high
Improve odds of higher deal value:
In the end, a solid financial outcome is the goal, and the right investment banker will serve as an advisor and fierce advocate who:
- Creates a competitive bidding situation that drives up the sale price and improves the deal terms
- Vets buyers carefully at every stage, ensuring you only invest your time with interested, qualified buyers prepared to offer viable bids
- Helps you sell at a higher premium, on average, than you would if you sold on your own (*Based on a 30-year study showing that private sellers commanded much higher valuations, on average, if they retained an M&A advisor)
The Cons of Working with an Investment Banker
There’s a reason some founders choose not to work with an investment banker to advise and guide them through a transaction. Most commonly, it’s that they are not aware of the improved outcome that can come from working with an experienced M&A advisor.
However, the following factors can also discourage some businesses from reaching out:
- Requires a fee, typically comprising an upfront retainer and a more substantial success fee once the deal closes
- Increases your emotional commitment to go through with a sale, since you will have paid and engaged a professional to handle it
- Could turn off a buyer who approaches you directly in the hope of avoiding a competitive bidding situation
- Reduces the odds a buyer who approaches you directly will win the deal, since more interested parties are at the table
All in all, the potential disadvantages of working with an investment banker for middle-market companies typically don’t outweigh the advantages of having expertise on your side.
We know firsthand how hard it is to start and grow a successful company. And we get that this is one of the most important decisions of your life—one you can’t leave up to chance. Reach out to our team to get the expertise of our advisory team here before making your next big move.