Selling your business is no simple task. It can be time-consuming and intricate. However, working with investment specialists to oversee the transaction can reduce stress and improve the business sale’s chances of closing. To ensure you hire the best investment bankers for your company, familiarize yourself with the services they provide and ask questions before committing to working with one.
In this article, you’ll learn all about the role of investment experts in selling a business, the different ways they can help you sell, and how to choose the right investment banker.
The role of investment bankers in selling a business
Investment professionals are invaluable on the sell side of mergers and acquisitions (M&A). This is because they can assist with anything from determining a fair price for your firm to advising you on the best deal structure and conditions to representing your interests throughout negotiations.
An investment banker acts on a company’s behalf as an intermediary between potential buyers and sellers as well as potential lenders. The bank’s familiarity with the market and the sale of enterprises will be critical in negotiating the most favorable terms for your business sale. The bank’s increased resources can lighten the load of the sale process. This will allow your management team to concentrate on day-to-day operations with less disruption. To help the business owner decide whether or not to sell, the bank can also offer an impartial, third-party perspective and objective recommendation.
How to find the right investment banker for your sale
Create a short list of investment banks to interview by tapping into your personal network, web resources, and the advice of experts. The next step is to conduct interviews with the shortlisted investment banks to evaluate which one best suits your company and the transaction size.
Steps involved in the sale process
Investment bankers assist with various stages of a transaction. This includes:
- Establishing an acceptable price range for your company’s valuation
- Evaluating alternative strategies that do not involve selling the business
- Finding and getting in touch with prospective buyers
- Contributing to the sale of the company by assisting with preparations (such as developing marketing materials and coordinating site visits and management presentations)
- Creating a plan and taking charge of the sale, including ensuring all parties stay on track to meet crucial deadlines
- Evaluating bids and negotiating the transaction agreement, along with the financing structure and terms, together with legal counsel
- Conducting due diligence and providing a formal opinion to the company’s shareholders on the fairness of the acquisition (financially speaking)
Important considerations before you hire an investment banker
While investment specialists can be great to work with, hiring an investment banker is not always the best course of action. Here are a few examples of when not to hire one:
- When you’re trying to raise around $10 million from a venture capital (VC) firm: Unlike growth equity/private equity firms, VC firms often avoid working with bankers and prefer dealing directly with companies in venture capital deals.
- When seeking funding from a group of investors as part of a primary offering of 100%: Companies with global recognition and recognition among consumers, such as Uber, Airbnb, and Slack, can raise billions of dollars in private primary capital without the help of a banker. This is because they can select their investor group based on their personal contacts.
- When the main reason for selling is to acquire intellectual property or a company: Bankers can only be of use in these situations if you include a term sheet.
Benefits of working with an investment banker during a sale
Source: Freepik
An investment banker can help you with the things you don’t have the time, knowledge, or resources to do on your own. Here are seven benefits of working with investment experts.
1. Oversee the due diligence process
Interested buyers will thoroughly investigate your organization to guarantee its legitimacy. But managing the demands of potential buyers can require a lot of effort on your part. Investment professionals assist in overseeing the due diligence procedure by doing two things:
- Providing all relevant parties access to the necessary data: Each potential purchaser is aware of the other participants and their abilities to attempt to rush ahead and restrain the process. A banker will establish firm dates for important events (such as management presentations, deadlines for submitting indications of interest and letters of intent, etc.) to ensure everyone is on the same page.
- Keeping sensitive information safe from unqualified parties: Some people who contact you are just trying to obtain information, possibly in preparation for an investment in a rival company or for a portfolio firm. You shouldn’t waste your effort on non-transacting parties. A banker can assist in identifying and eliminating potential sources of data breaches.
2. Interact with buyers
Connections between sellers and purchasers can be complex because founders, in the event of a strategic or partial buy, seek to maximize their worth in the transaction but also want to maintain good relations with potential future partners.
Investment experts can mediate the negotiation and bring about a satisfactory resolution. To be more specific, advisors can:
- Start the transaction on an affirming note. If a buyer spots a banker in the mix, they know they’re in for a competitive bidding battle. In a competitive procedure, the buyer has to make their best effort or risk losing to the competition.
- Act tough when needed. When negotiations stall, be firm about the conditions of the arrangement. Because of their position in the transaction, bankers are more prepared to engage in such conflicts.
3. Frame your business
First impressions are lasting ones. That’s why it’s important to present the company’s offerings and key performance indicators in the best light possible.
Investment professionals are pros at painting a picture of a firm that plays up its best qualities while downplaying its weaknesses. Bankers know what information investors and buyers look for and can anticipate questions that may arise during diligence because of their experience with previous deals. With this knowledge, salespeople can anticipate problems and create a clear narrative out of data trends.
4. Structure the transaction
It takes more than knowing how to present your company to potential buyers to close a deal successfully. A great deal of specialized information about transaction structuring can affect the outcome. A typical start-up’s founder would lack this kind of expertise.
For instance, do you know how liquidation preferences function? How well versed are you in the specifics of private equity transactions, particularly the distinctions between convertible preferred securities and participating preferred securities? It’s important to understand these differences. The conditions of your transaction may affect your eventual economic outcome when the eventual purchaser sells the company in 3–5 years.
Buyers can use their knowledge of transaction structuring to their advantage. Even if they insist on not going through with the purchase, if you work with an investment banker, you can be sure that they have their own buying team. So, it’s beneficial to have your own team of experts ready, just in case.
5. Dedicate the necessary bandwidth
Having ample time and space to complete a transaction is crucial. CEOs and other high-ranking employees of companies that attract purchasers have their hands full with the business’s daily operations. How likely are you to simultaneously negotiate ten to fifteen term sheets? If you did manage to find the time, it would be better spent improving your company. The main danger is that your company’s management may become preoccupied with the deal process, leading to decreased productivity.
6. Negotiate terms with many parties
Parallel negotiations with as many as ten parties are often required as part of the deal-making process. Getting the highest bid isn’t the only goal of the talks. While the headline enterprise value is often the most publicized statistic regarding a deal, a larger deal size isn’t always preferable, depending on the specifics of the agreement. You will also need to negotiate on the following key points of a term sheet:
- How will you distribute your shares in case of a liquidation?
- To ensure that the acquirers get only what is necessary for ongoing operations, you must agree on a working capital objective and how to treat deferred revenue.
- When and how long would an interested buyer have exclusive access to conduct due diligence?
- Will employment contracts be offered to the executive team and other high-level employees?
- When relevant, the specifics of an earn-out include the primary success metric, the length of this earn-out term, any upfront or contingent compensation, etc.
- Private and public stock considerations must be included. This includes when a buyer provides stock instead of cash or when founders negotiate lock-up periods before selling their remaining shares.
- How much of the sale price will be put into escrow and for how long?
- In addition, there are matters of insurance and taxation to consider.
Bankers have a bird’s-eye view of a deal and will negotiate in parallel on all material issues for both parties.
7. Find the most suitable buyer
Professional bankers are familiar with the landscape of potential buyers and can guide you to a partner whose objectives and resources complement your own. An investment banker can aid in the search for a suitable buyer by assisting you to:
- Find a purchaser who will be a good strategic or cultural fit. Nothing is more crucial to a successful transaction than a harmonious relationship between the buyer and seller. When faced with a high-value offer, some businesses will choose to pass because they fear the buyer will harm the company somehow.
- Pay close attention to the most lucrative customers and financiers. Saving you time from chasing partners that aren’t a great fit, investment bankers have the knowledge and experience working with clients to evaluate which investors and buyers may get aggressive and pay premium prices.
- Bring in fresh purchasers. On the side of strategic buyers, founders often make the mistake of assuming they know all the important strategic buyers because of their extensive familiarity with their sector. However, it’s not uncommon for founders to overestimate the number of potential strategic purchasers, thinking there are only five to ten. A banker can bring in additional potential purchasers, increasing competition and ultimately enhancing the situation for the company’s creators.
Your future responsibilities at the company may change depending on which buyer you choose. After the deal closes, what are your long-term plans for the company? A banker can assist you in finding a buyer whose interests are compatible with yours.