This article was written by John Rogers, Consulting Manager.
As investment bankers in the middle market, we are constantly having discussions with business owners who are contemplating the sale of their business. It’s not uncommon for that business owner to already have a potential buyer at the table. In these cases, “Do I need an investment banker if I already have a buyer?” is one of the first questions we hear. The answer is a definite “YES.” A common misconception of business owners is that investment bankers simply bring potential buyers to the table. While certainly an important step, this only scratches the surface of the true value these professionals bring.
Selling a middle-market business is a significant event that requires careful planning, strategic decision-making, and expertise. While finding a buyer for your business is an important step, it is crucial to recognize the ongoing importance of having an investment banker during the sale process. Investment bankers bring a wide array of skills, industry knowledge, and experience to the table, ensuring that you maximize the value of your business, navigate complex negotiations, and achieve a successful transaction. In this article, we will explore the main reasons why it is vital to engage the services of an investment banker, even when you already have a potential buyer for your middle-market business.
- Expert Valuation and Positioning: Determining the accurate value of a business is a complex task that requires in-depth financial analysis, market research, and understanding what buyers are looking for. Middle-market businesses are generally valued based on a multiple of the business’s recurring EBITDA (cash flow). Investment bankers possess the expertise to 1) identify and quantify credible adjustments that maximize a business’s EBITDA, and in turn, transaction value; and 2) control the narrative when positioning that information to the potential buyer. Having an investment banker assist with “telling the story” to potential buyers brings instant credibility and professionalism to a potential transaction. Their knowledge of market conditions and industry dynamics allows them to position your business effectively, increasing its attractiveness and potential value.
- Negotiation and Deal Structuring: Negotiating a business sale involves intricate discussions and deal structuring to meet the needs of both the buyer and the seller. This is where an investment banker proves their worth. Investment bankers serve as intermediaries, leveraging their negotiation skills and industry knowledge to strike a favorable deal for you. They understand the intricacies of deal terms, contractual agreements, and tax and legal considerations, ensuring that your interests are protected throughout the transaction process. Once a Letter of Intent (LOI) is executed between buyer and seller, seller generally loses a significant amount of negotiating leverage from that point forward. Having an investment banker by your side to negotiate the key terms in the LOI in advance of signing is crucial.
- Efficient and Streamlined Process: There’s a common saying in the industry that “time kills all deals”. Deal fatigue is real; and if a sale process is moving slow or is disorganized, it can quickly fall apart. Selling a business involves numerous complex tasks, including preparing materials, coordinating due diligence, managing legal documentation, and coordinating various stakeholders. An investment banker brings a structured approach to the entire process, streamlining activities, and ensuring that deadlines are met. Their project management skills and experience help minimize disruption to your day-to-day operations, allowing you to focus on running your business while they handle the specifics of the sale process. With any deal, there are always some last-minute challenges or obstacles that need to be addressed. Investment bankers are experts in closing deals and can help navigate these obstacles to get your deal across the finish line.
- Confidentiality and Discretion: Maintaining confidentiality during a sale process is crucial to preserving the goodwill, reputation, and stability of your business. Investment bankers are skilled at maintaining confidentiality, employing robust processes and protocols to safeguard sensitive information. They act as a buffer between you and your potential buyer, ensuring that sensitive information remains confidential until an appropriate stage of the transaction. They also act as “the bad guy”, when needed, by having the difficult conversations with your potential buyer so you don’t need to. Having that intermediary is a good buffer to keep emotions in check and prevent buyer and seller from potential confrontation or relationship damage.
- Access to Extensive Networks: Having a potential buyer is great, but in no way does that mean a deal is imminent. Investment bankers possess deep-rooted connections and extensive networks within the business and financial community. These relationships offer valuable access to potential buyers, including strategic investors and private equity firms. By leveraging their networks, investment bankers can expand the pool of potential buyers, increasing the competitiveness of the sale process and potentially driving up the transaction value.
- Avoiding Potential Pitfalls: Each M&A transaction presents a wide variety of potential pitfalls to avoid. The most common pitfalls that we see include improper timing of a potential sale transaction, not being prepared, not being forthcoming with information, failing to continue to operate the business in the normal course, failing to be open to offers from competitors, not hiring proper legal counsel, and not appreciating that time kills all deals. Experienced investment bankers have seen and overcome these hurdles multiple times and can be worth their weight in gold as you pursue a sale transaction.
A good investment banker does significantly more than bring potential buyers to the table. Their expertise in valuation, negotiation, and deal structure, combined with their extensive market and industry insights, can significantly impact the success and value of your transaction. No business owner should go at it alone. Having an investment banker as your trusted advisor during the process is the best way to ensure a smooth transaction and avoid potential pitfalls along the way. If you’re talking to a potential buyer, we strongly recommend that you contact an investment banker before having any discussions surrounding valuation or deal terms.
If you need further guidance or have any questions on this topic, we are here to help. And if you are thinking about selling your business and are curious about learning more about anything described in this article, please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.