Engaging an Investment Banker: What You Should Know

6/01/2013

 In the prior article titled Investment Banking Retainer Fees - Beware of Conflicts I mentioned that the average closing rate among US intermediaries representing transactions valued in the range of $5 million to $30 million range is approximately 30%.  I also stated that the average engagement fee for such transactions is around $50 thousand.  Needless to say, I never met a business owner who wanted to pay an engagement fee or retainer, especially with a success rate of only 30%.  So what are you going to do about this issue when it is time to sell your business?  My suggestion when choosing an investment banker is as follows:

  1. Be sure to get a valuation from the prospective banker prior to engaging.  Make sure that the Banker justifies the valuation to you with high credibility.
  2.  Some bankers may try to charge you for the valuation. In my opinion, this is an investment that the banker needs to make in order to “quote the job”.  Would you pay a builder to quote you price to build a home, or a real estate agent to give you an estimate on the value of your house?
  3. Ask the banker what he/she thinks is the probability of closing the transaction at the valuation provided.
  4. Don’t even consider selling your Company if the probability is less the 70% - 80%.  There’s just too much work and exposure risk to enter into this arduous process for any less than a 70% probability of success.
  5. Assuming that the banker is quite confident of meeting your objective then ask him/her “If you are so confident of selling my company, why then do you need a retainer?”

Several common answers to this question are:

  1. Because it typically takes 6 – 12  months to sell a company and in the meantime we have significant overhead.
  2. Because we need to know you’re serious before we invest our substantial resources to sell your company.

My thought on these answers are as follows:

  1.  I would not want to engage with an advisor that is going to assist me to sell one of the largest, if not the largest, transaction of my life if that advisor needed my retainer to pay his overhead.
  2. If the advisor cannot tell if you, the Prospective Seller, is serious then how on earth will he/she be able to determine if the potential buyer is serious?  After stating the foregoing to the advisor perhaps he responds with; “With no skin in the game what is stopping you from just changing your mind after we expend a substantial amount of our resources to sell your Company?”  There are many ways to deal with this, such as the implementation of a break fee in the event that the advisor brings bonafide offers which meet some predetermined criteria.  The advisor is supposedly an expert in deal structuring, surely he can structure a deal with you that will meet both of your needs!

OK, down to brass tacks.  The above is all well and good but the fact of the matter is that most advisors in the lower middle market just cannot afford to do enough diligence to provide them with the confidence they need to waive the retainer. Let’s, for a moment, put aside the potential conflicts of interest that a large engagement fee can cause.  If the advisor does not have confidence that they will succeed, at least a 70% confidence level as previously stated, then I don’t believe that the business owner should hire such advisor. The worst thing that can possibly happen is that you execute the selling process more than once. This is one process that you want to do the right way the first time.  The implications of going to market a second time can be disastrous, but this is a topic for another article.

With the above stated, if you find that you  cannot avoid paying the retainer and still want to engage the Advisor,  at least you should have gotten a warm and cozy from the answers the Advisor provided to the above questions.  I think you will be surprised by the type of answers you get. The worst that happens, as a result of these questions,  is that you will learn allot about the thinking of the advisors which may represent one of the most important  transactions of your life.

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