The Role of an Investment Bank in Positioning Your Business
- What it means to have an investment banker position your business
- How a banker positions a busines at various stages of the deal process
Founders often believe a business that performs well will sell itself. But just because a business sells does not mean the sale was optimized. A diamond may sell for a dime, but such a transaction is hardly successful.
For a business to sell optimally, the business’s data must be presented as part of a cohesive narrative that describes the past successes and future prospects of the business. To achieve a good outcome, founders should seek out investment bankers expert at positioning businesses favorably for buyers.
What Is Positioning?
Positioning is the process of shaping how investors and buyers view a business in a way that justifies higher strategic value. In other words, positioning is the combination of tactics an investment banker uses to control the narrative of a business and create a favorable image for investors grounded in reality.
Positioning is one of the best ways an investment bank can provide value in a transaction. The enterprise value added by an investment bank through appropriate positioning and a competitive sales process more than justifies the cost of hiring an investment bank.
What Positioning Isn’t
The goal of positioning is not to misrepresent or shroud data/results—you don’t want to over-position and put "too much spin on the ball." Hiding information in no way benefits founders selling businesses, as anyone who will eventually invest in a business will have full access to data during the diligence process. No amount of positioning can obfuscate the truth.
Positioning is not about altering the truth, but rather crafting the data and company story in a way that shows how the company’s position is even more favorable than it appears on the surface.
Positioning Is a Collaborative Effort
Business owners who have been steeped in business operations for years will have a strong concept of what their business is and how to present it. On the flip side, an outside investment bank will have additional ideas about the best way to position a business—ideas a founder likely hadn’t considered. Each party brings an important set of perspectives to the table in determining how a business will be positioned for potential buyers.
For example, business owners may be inclined to show to investors the same metrics managers use to run the business. However, in many cases these management metrics are not industry standard for investors and strategic buyers (called buyers from here on out), and therefore may not tell the best story to the buyers evaluating a business acquisition or investment. As such, investment bankers can provide valuable insight to founders on how to present to potential buyers.
On the other hand, the insights founders bring to the table are essential—their deep knowledge of the company and market brings important insights to light. For example, Vista Point has done 14 deals in edTech and yet in each deal each founder has brought new insights to their specific situation.
Founders and their investment bank need to work together to land on the best narrative. Your investment bank should never represent your company in a way you feel uncomfortable about. At the same time, an investment bank can help you as a founder know what buyers expect to see in a management presentation.
The Stages of Positioning with an Investment Bank
Positioning is a gradual process occurring throughout different stages of the transaction process. While formal positioning begins after signing an engagement letter with an investment bank, at Vista Point Advisors we often support founders even earlier in the process.
In general, positioning tends to occur in the following stages:
Pre-engagement comes before signing a formal engagement letter, during which a banker provides pro-bono counsel to founders considering a transaction. This period of informal advisory can last a matter of weeks or as long as 4-5 years, during which the banker can build a long-term relationship with the selling company.
Typical counsel we provide to our pre-engagement clients regarding positioning include the following:
- Revenue projections. We advise founders to not share projections with buyers until beginning a formal process. If you do share forecasts, limit them to yearly forecasts.
- Spending money. How you allocate budget will influence EBITDA, OpEx, CapEx, and other features of your business. Companies should aim for a 40% growth-efficiency metric.
- Changing revenue makeup. Buyers value recurring and scalable revenue models (like SaaS) more than they do transactional revenue (like services businesses). We advise companies how to position and transition their revenue makeup to models that most impress buyers.
- Focusing on conversions. Where you focus your attention in terms of customer segments and new programs now will affect what you’ll be able to present to buyers several months down the road. We advise companies on where to put more or less emphasis on pilot programs or low-value customers.
- Prioritizing sales & marketing. Different sales & marketing strategies, such as launching new geos, reducing training time for new reps, or spending money on specific channels, can affect the actual and perceived position of your company.
- Cleaning the cap table. Buyers require a clean cap table with clear-cut documentation of stock/option certificates and how shares are aggregated or bought from inactive shareholders. We advise founders on how to clean the cap table before going to market with their business.
Pre-marketing begins after signing an engagement letter with an investment bank and ends when the bank starts actively marketing the business to interested buyers. The period between signing an engagement letter to a final closed deal takes about 4-6 months.
An investment banker can advise you on actions you should and shouldn’t take in preparation to go to market. For example, we advise our clients that they should continue business as usual as if they weren’t preparing for a transaction. In other words, the company shouldn’t incur any large, out-of-the-ordinary expenditures or distribute any large dividends.
In addition, during pre-marketing, an investment bank will help frame specific business metrics in preparation for management presentations to potential buyers. These metrics include:
- Churn & Retention
Recurring revenue tends to be investors’ preferred model and is a primary contributor in determining valuation multiples. If your company operates on a recurring revenue model, your investment banker should highlight the value of that recurring revenue wherever possible.
The proportion of revenue that is recurring plays an important role. If a business is less than 70% recurring revenue, you will find it difficult to position the company in such a way as to merit the handsome multiples typical of software companies with subscription revenue. In the event that less than 70% of revenue is recurring, investors and buyers will sometimes prefer to use a sum-of-the-parts valuation methodology, in which they will calculate valuation for the different revenue streams separately, often valuing your company at a lower valuation. As such, the more you can move to a recurring model, the better.
One positioning tactic that can be helpful to improve multiples is to highlight how the rate of growth on recurring revenue is greater than total revenue growth (if such is the case), showing a movement in the direction of a recurring model.
Another tactic is to position transactional revenue as re-occuring, so long as that revenue occurs predictably. Doing so can help give that revenue the proper multiple for the seller.
Churn & Retention
Every company approaches churn and retention differently. An investment banker can help you standardize your calculation of these two metrics in a way that buyers are familiar with.
If your churn and retention metrics aren’t stellar, your investment banker can tier customers by spend to show how certain tiers churn at a low rate. For example, you could focus your churn analysis on the top 80% of customers in terms of spend and show how these customers have favorable churn numbers.
In the end, buyers are going to have full access to the data and will be able to run their own churn analyses. However, giving the proper frame of reference when originally presenting the data can set an anchor and give context to buyers’ analyses during diligence.
Don’t share raw revenue-by-customer data and miss the opportunity to set an anchor for buyers’ analyses.
Buyers will take a hard look at a target company’s EBITDA to understand profitability, but the EBITDA on the income statement doesn’t necessarily represent the company's true profitability.
For example, a company may have incurred one-time, non-operational expenses that don’t represent the true cost of doing business. For example, if a founding CEO were to pay themselves an $800K salary but the market rate for their role is $300K, then the delta between the two salaries could be added back to EBITDA.
Another adjustment to make to EBITDA is the capitalization of software development (which works in the opposite direction). Even though capitalizing the cost of software dev and amortizing it over its lifetime is acceptable under GAAP, investors don’t view software costs this way. As such, you will need to recalculate the cost of software at the time the expense is incurred.
In the event that a buyer asks why a company is not more profitable, an investment bank can help founders demonstrate to buyers that, due to prior decisions to not raise outside capital, management had to make choices of where they should and shouldn’t invest resources. Founders can then show buyers how additional capital could help the company capture low-hanging fruit and increase profitability.
When the time comes to actively market your business, your investment bank will schedule management presentations with interested and qualified buyers. The content of these presentations is the material you prepared with your banker in pre-marketing.
You should rely heavily on your investment banker to build out your presentation deck and to coach you on how to present to buyers. The deck should be in a format that is industry standard and easy for buyers and investors to interpret.
Again, you should not send over raw data at this stage. Sharing raw data results in buyers jumping to their own conclusions. To start, you want to mediate access and interpretation of data.
Though buyers will eventually have the chance to see data in its raw, unmanicured form, appropriately positioning the business data is important to keep buyers interested enough to commit diligence resources and move forward with a transaction.
Improve Your Outcome Through Positioning
Whether your deal is in the distant future, already in progress, or nearing completion, as long as you’re not in exclusivity, you can benefit from the support of an investment banker to position your business. Working with an investment bank will help you market your business in a way to help buyers see how a great opportunity is in front of them, and they’ll respond in kind.