In the M&A process, investment banks (“advisors”) are used to advise both buyers and sellers. Advisors can choose which side they would like to work on (but not both simultaneously) and indeed most firms have acted in both capacities at some point in time. Advising on both the buy-side and sell-side, however, poses an inherent conflict of interest and this conflict most significantly hurts sell-side clients.
Buy-side clients of an investment bank are usually large companies and institutional investor groups (VCs and Private Equity firms). Large companies hire advisors to acquire other businesses or execute financings of various types; institutional investors hire advisors to acquire businesses (or parts of businesses) or represent their many portfolio companies that may need to explore a sale or capital raise. Sell-side clients are generally smaller businesses looking to raise capital or sell themselves outright to a buyer.
Buyers or Sellers? Who is more important to Investment Bank Advisors?
Many investment banks consider buyers more important than sellers because buyers generate a constant flow of transaction business; investment banks that favor buyers hurt sell-side clients in several ways. Firstly, advisors have little incentive to show deals to a very broad group of buyers. By continually showing deals to the same few buyers, advisors hope that they will build goodwill for business down the road. Secondly, advisors are not incentivized to push buyers or make a process competitive. Souring the relationship with the buyer over an incremental 5-10% in transaction value for a client could mean millions of forgone future fees.
If you are contemplating a financing or exit, it is imperative that you check the background of the bank you select; an advisor with a history of buy-side relationships may be detrimental to your sell-side transaction. An easy way to spot this is by simply looking at the historical transactions to see who the advisor represented across several deals. Most big banks even have a “financial sponsors” or “financial institutions” group, which explicitly looks to serve investors and is an obvious signal that a conflict of interest exists. Of course, sometimes this relationship isn’t as salient, in which case you can always ask your potential advisor outright.