Value of an Investment Banker in the M&A Process

Value of an Investment Banker in the M&A Process

Why do you need an M&A Advisor?

There is often a great deal of debate when considering to engage with an Investment Banker / M&A Advisor when it comes to selling your company. To have achieved enough success and growth to consider selling, companies must already be helmed by intelligent, problem-solving individuals. As such, selling your company is often looked at as another goal easily achievable by your world-class team, begging the question; will an investment banker provide value, or are you better off navigating these waters alone?

M&A is an incredibly complex process with lots of twists and hidden pitfalls that can make the process much more difficult, and potentially catastrophic if not managed properly. As middle-market companies are an extensive portion of global commerce, it is critical to understand this market well. Many sellers who approach this process on their own lack an understanding of the transaction process, do not have an in depth understanding of the market value components of their business, which can easily become detrimental to the sale process.

In a recent study conducted by Michael B. McDonald, a professor of finance at Fairfield University, 85 business owners who had sold middle market companies for amounts ranging from $10 million to $250 million in the last five years were surveyed. Of respondents, 69% of owners who sold their business with an investment banker said yes, they provided significant value.  All in all 100% of business owners surveyed found considerable value when engaging an investment banker.

The report also states: "Regular users of middle market investment banking firms such as private equity firms are convinced of investment bankers’ value as virtually all private equity firms hire investment bankers when selling their portfolio companies."

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Investment bankers consistently provide value to your transaction, but in what way? M&A advisors serve as a guide throughout the deal process, managing the transaction at every stage to ensure you yield the best value for your company. In the same study, business owners scored the following eight services provided by investment bankers as most valuable:

Study conducted by Michael B. McDonald, a professor of finance at Fairfield University

#1: Managing the M&A process & strategy.
Nearly all business owners say managing the complex M&A process is the most valuable service the banker provides. Solid and experienced investment bankers establish a thorough process and a strategy to execute, keeping in mind your goals and constraints; including a go-to-market plan, constructively documenting and presenting your company, negotiating best structure and key terms of the transaction, providing oversight and advising on all aspects of documentation, managing and negotiating all ancillary (yet very important) elements of the transaction, due diligence management and managing a timeline. When a buyer is engaged, the banker then structures the transaction to ultimately suit you and your company. Without this disciplined process, you may often wonder if the best offer was obtained.

#2&4: Structuring and negotiating the transition.
Managing this complex process is one of the most valuable services a banker provides, which includes structuring all points of the transition. With a myriad of experience, bankers negotiate on your behalf to achieve objectives and limit potential risks, thus significantly increasing the probability of a successful close. In developing this balanced solution, sellers often gain significant benefits beyond a successful closing, such as preferential tax treatment or ensuring intangibles for the business owner like retention of key staff, additional earn outs, bonus programs, and more.

#3&5: Allowing owners and management to continue to focus on their business.
M&A is a lengthy, complex process that easily becomes all consuming. Bankers manage the entirety of the process, allow you to focus on your company success during transition and do what is right for your team. A good advisor will learn and understand your business, and coach you through the complex process.

#6: Establishing seller credibility.
Most first-time sellers do not know the true value of their business, so the involvement of a banker often creates credible information and a clearer expectation of valuation; 84% of business owners in Dr. McDonald’s previously mentioned study found their final sale price was equal to or higher than the initial price estimated by the banker. By engaging with an advisor you level the playing field by placing yourself on the same plane as professional buyers.

#7: Preparing the company for sale and coaching you through the sale process.
As the seller you are able to step back from negotiations when engaging an investment banker to manage a sale process. Using a banker to lead often difficult negotiations gives you the ability to maintain a positive working relationship with your buyer. This is imperative, as this relationship is often long lasting; if a seller takes on these negotiations themselves this relationship can often begin strained. Bankers protect the seller from potentially contentious deals while coaching you through the process to ensure your company is purchased for full valuation.

#8: Engaging and identifying the best buyer.
It is interesting that the study found this item lowest on the list for the 85 companies surveyed.  Often a seller will start here with this as their number one priority [find me a buyer at the highest price!], but quickly learns that it is a deep understanding of your business and a professionally run process, complemented with a solid structure of the deal that yields the best result short and long term. M&A advisors enter every transaction with a wide network of professional contacts, industry databases, extensive research, and wide networks of relationships. By understanding your business, your desires & values, and overall objectives for your company, they pair these requirements with an audience of credible buyers sharing similar goals. This allows the advisor to successfully identify buyers and manage a competitive bidding process, inevitably maximizing the shareholder value and ensuring a strong partnership. The more complex your business and the market is, the more critical the need for an aligned M&A Advisor becomes.

"Mergers are like marriages. They are the bringing together of two individuals. If you wouldn't marry someone for the 'operational efficiencies' they offer in the running of a household, then why would you combine two companies with unique cultures and identities for that reason?"         - Simon Sinek

For both business owners and advisors alike, managing the M&A process and strategy is considered the most valuable service an advisor can provide. You can be assured that as a business owner you are making a valuable investment when engaging with an investment banker. Leveling the playing field between buyers and first time sellers ultimately leads to a more effective negotiation, amicable transition, and more value (tangible & intangible) for your company. Not all business owners need to use an investment banker, but the benefits one can provide are indisputable.