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— A VPA Perspective

Why Hire an Investment Banker When Selling Your Company

Summary
  • Deciding whether or not to run your transaction with an advising investment bank
  • How an investment bank helps with diligence, buyer relationships, and framing the business

As the time for an exit approaches, you’re faced with an important question. When selling your business, do you:

  1. Negotiate the sale on your own behalf?
  2. Hire an investment banker to facilitate the sale?

Negotiating on your own behalf is a tempting answer choice because over the course of running your business:

  • You’ve come to understand your industry landscape relatively well, including the goals and interests of potential buyers
  • You’ve been knee-deep in the business and feel you can market it better than anyone
  • You’ve received so much inbound interest from potential buyers, you feel you have a competitive buyer pool to draw from
  • You may even have an offer on the table you feel excited about

With all these points in your favor, you may be ready to begin negotiations on your own. Before you do, consider how an investment banker can increase the overall size of the deal and find the right go-forward partner.

Approximately half the time Vista Point is hired as an advisor, our client already has an offer on the table. Of our last 5 deals where our client had a term sheet on the table before we started working with them, we were able to add 62% to the enterprise value and 14.5x our fees.*

*Note: Past results are not an indicator of future outcomes.

Working with an investment banker can improve the overall outcome of the deal. Read on to learn what a banker brings to the table.

Why Selling Your Business with an Investment Banker Is the Best Option

Despite your robust knowledge of your industry and company, an investment banker can help you with activities that you don’t have the time, resources, knowledge, or network to execute on, ultimately resulting in a better outcome. As part of an organized deal process, a banker is best equipped to:

  • Manage the due diligence process
  • Interact with buyers
  • Frame your business
  • Structure the transaction
  • Dedicate the necessary bandwidth
  • Negotiate terms with multiple parties
  • Find the right buyer

Manage the due diligence process

Potential buyers are prepared to do their homework on your company to make sure everything is in order. Managing the demands of buyers takes a lot of work.

Investment bankers help manage the due diligence process by:

Giving all parties access to the same data at the same time. Each potential buyer knows he’s competing against others, so certain parties will do their best to run ahead and choke out the process. A banker will set clear timelines for certain activities (e.g. management presentations, indication of interest deadlines, letter of intent deadlines, etc.) to keep everyone on the same footing.

Protecting data from uninterested or unqualified parties. Some parties who reach out are only fishing for data—perhaps because they’re planning to invest in a competing company or want your data for a portfolio company. Other parties aren’t able to transact and aren’t worth your time. A banker can help you root out these parties to protect your data from getting into the wrong hands.

Interact with buyers

Interactions between sellers and buyers are tricky because on one hand the founders want to increase their value in the transaction but on the other hand they don’t want to burn bridges with a future partner in the case of a partial or strategic buy.

An investment banker can help resolve this issue by serving as the go-between in the transaction. Specifically, an advisor can:

Set the tone of the transaction. When buyers see a banker is involved in a transaction, they know that means the process will be competitive. A competitive process means the buyer will need to put their best foot forward and won’t prevail in the process if they are low bidders.

Be tough when necessary. Sometimes a deal can hit a wall and you have to be tough on the terms of the transaction. Bankers are better equipped to fight those battles based on their role in the deal.

Frame your business

You only get one chance to set a first impression with a potential buyer, so you want to make sure to appropriately frame the company’s products and metrics.

Investment bankers are experts in framing businesses to highlight a company’s strengths and minimize its deficiencies. With multiple deals already under their belts, bankers know what information buyers and investors look for and are able to anticipate questions that may come up during diligence. This expertise allows sellers to get ahead of any potential issues and form a concise story around trends in a company’s data.

Structure the transaction

Carrying out a deal isn’t just about framing your business in a way that’s appealing to buyers—there is a lot of specialized knowledge about structuring the transaction that can affect the final outcome. The average founder doesn’t have this specialized knowledge.

For example, do you understand how liquidation preferences work? Do you understand the difference between a convertible preferred security vs. a participating preferred security in a private equity transaction? Not knowing the difference can be dangerous because the final terms of your transaction could affect your ultimate economic outcome when your buyer sells the business in 3-5 years.

Buyers are experts on how to structure deals, and can use that expertise to their advantage. Even if they tell you that they won’t work with you if you work through an investment bank, you can be certain that they hire advisors of their own for the buying process. Make sure you have expertise on your side of the court too.

Dedicate the necessary bandwidth

A major aspect of carrying out a deal is pure bandwidth. If yours is a company buyers are interested in, then you as the CEO or other senior-level member of the company are certainly very busy carrying out day-to-day operations.

Do you think you could find time to concurrently negotiate 10-15 term sheets in parallel? The bankers at Vista Point Advisors dedicate 400+ hours of work per transaction to do just that.

Even if you could find the time, that’s time you could have spent improving the position of your business. The biggest risk during the process is underperformance of your company because your management team becomes distracted by the deal process.

Negotiate terms with multiple parties

As mentioned, part of the deal process is negotiating with upwards of 10 parties in parallel. The negotiation goes far beyond seeing who bids the highest price. While the most visible aspect of a deal is usually the headline enterprise value, a higher deal size isn’t necessarily better, depending on the terms of the transaction. Other important aspects of a term sheet that you will negotiate on include:

  • How your shares will be cashed out in the case of a liquidation event
  • A working capital target and the treatment of deferred revenue so that the acquirers don't receive excess cash at close outside of what's needed for ongoing operations
  • When and for how long a potential buyer will be granted exclusivity for diligence
  • Whether the management team and key employees will receive employment agreements
  • When applicable, the structure of an earn-out, including the up-front and contingent payments, primary performance metric, length of the earn-out period, etc.
  • Public and private stock consideration, such as when a buyer offers stock in lieu of cash, or negotiating lock-up periods for when founders can sell their remaining stock
  • What percent of the transaction will be held in escrow and the length of the escrow period
  • Other items, such as representations & warranties insurance and taxation

Bankers see the full picture of a transaction and will negotiate on all relevant terms for all parties in parallel.

Note: M&A attorneys are not M&A negotiators

A great M&A attorney is extremely valuable in a transaction, however, once you’re at the stage of hiring a lawyer, you should already have the top 3-4 parties fully engaged. A banker can help you get there.

Find the right buyer

Experienced bankers understand the overall buyer landscape and can help you find the best go-forward partner whose interests and resources align with your own goals. An investment banker will be able to support finding the right buyer by helping you to:

Identify a buyer with the right cultural or strategic fit. Ensuring alignment between the seller and buyer is as important as any other aspect of a transaction. Some companies will forgo a transaction with a company offering a high valuation due to concerns that the buyer might be destructive to the business.

Focus on the most valuable buyers and investors. Investment bankers have the expertise and previous experience working with clients to determine which buyers and investors can get aggressive and pay premium valuations vs. those who can’t, saving you time from chasing the wrong partners.

Bring new buyers to the table. On the strategic buyer side, founders often incorrectly assume that given their in-depth knowledge of their industry they already know all the relevant strategic buyers. Founders may think there are only 5-10 relevant strategic buyers, but that is frequently not the case. A banker can add buyers to the process, creating more competition and a better outcome for founders.

Finding the right buyer also affects your role in the company going forward. Following the transaction, what will be your go-forward role in the immediate future and beyond? The right buyer’s interests will align with yours, and a banker can help you determine alignment.

Situations Where Hiring An Investment Banker Might Not Be Right

Hiring an investment banker isn’t always necessary or the right move. Here are some applicable situations:

When raising <$10M from a venture capital firm. In venture capital transactions, VC firms typically prefer to deal directly with the company, whereas it’s commonplace for growth equity/private equity firms to work with bankers.

When conducting a 100% primary raise from a consortium of investors. Well-known, international brands like Uber, AirBnB, Slack, etc. can raise billions in private primary capital without using a banker because everyone on Earth knows these businesses and they can pick and choose their investor group based on personal connections.

When the primary goal of a transaction is acqui-hire or IP/product acquisition. These scenarios are difficult for bankers to assist with unless there is already a term sheet on the table.

Select a Guide to Help You Through the Transaction

As a successful founder, you’ve certainly traversed a lot of uncharted territory and come out stronger. But when it comes to selling your company, you won’t want to enter that terrain without an experienced guide. By working with an investment banker, you’ll be able to:

  • Continue focusing on your business
  • Navigate the hurdles that buyers may throw in your path
  • Achieve the ideal outcome for you and your business
Modified on Jun 22, 2020