If you’re a business owner considering the sale of your company, you probably have a lot of questions right now.
One big decision you’ll need to make is whether or not to hire an investment banker — but you may not actually know what investment bankers do, or why you need one at all.
After all, your sales skills have helped you build a successful business, so it’s an easy logical leap to assume those skills are also the key to a successful business sale. Hiring an investment banker will reduce the amount of money you make, so why can’t you just do this yourself?
While it is true that a small percentage of entrepreneurs do sell their businesses without the help of an investment banker, the vast majority come to recognize the value that investment banking professionals provide. That’s because successfully selling a business doesn’t actually require much salesmanship — it’s more about analytic reasoning, attention to detail, and problem-solving, just to scratch the surface. And those are all skills in which investment bankers excel.
What do investment bankers actually do?
The first thing to understand about investment bankers is that they’re not bankers, at least not in the usual sense of the word. Yes, they know how to arrange financing from capital providers (banks, investors, or acquirers), that’s just one aspect of the complex transaction process. A better way to think of them is as project managers who set expectations with both parties regarding price and terms, prepare the materials that a lender or investor will need, do due diligence to ensure that both parties are presenting themselves accurately, and negotiate the transaction.
M&A deals are much more complicated than you might think they will be. It’s easy for an inexperienced party to be taken advantage of by somebody who understands how to adjust the terms of a deal so that one thing looks like another.
Couldn’t a lawyer or accountant help me instead?
You might already have a good accounting person to manage tax issues, and a lawyer to handle legal documents. But if you’re trying to negotiate a deal to sell your business, or get financing in return for a stake in your operations, you need a person who not only understands the market, but is an active participant in deals and has the credibility to get one done — a person who knows the terms, knows how deals are structured and knows how to find capital providers.
Lawyers aren’t necessarily going to save you from making a bad deal. That’s not their job. Their role is to create a sturdy document that holds up to scrutiny if there’s a dispute after the fact. They’re assuming that whatever the specific terms of the deal were, both parties were happy with them.
One important thing investment bankers do is help to make sure a deal’s business terms are actually fair. They work as part of a deal team that also includes you (the company executive or board member), a legal advisor, a tax advisor or CPA, and a financial planner, who will advise on how to manage the proceeds of the transaction.
What does the sales process look like?
Selling a business doesn’t happen overnight. When you factor in the time needed to raise capital, plan a transaction, negotiate terms and do due diligence, it takes slightly less than a year.
As you’re experiencing the usual series of offers and counteroffers, it’s natural to feel antsy at what feels like a prolonged process. An experienced investment banker can help by setting both parties’ expectations at the outset, so that each offer and counteroffer is in the zone of fairness and nobody feels like their time is being wasted.
Throughout the process, you’ll be presented with a great deal of information regarding the needs of capital providers or acquirers. An experienced investment banker will organize that information so that it’s easily digestible and understandable, and will also bring the necessary market knowledge, expertise and credibility to communicate with lenders and investors on your behalf.
What does an investment banker cost?
Normally, investment bankers receive payment in two ways: retainer fees and success fees.
Retainer fees are upfront or periodic payments that help cover initial preparation and ongoing efforts. They range from $5,000 to $15,000 per month, depending on the deal’s complexity and size, and might total between $40,000 and $100,000.
This fee is sometimes credited against the success fee that the investment banker receives at the close of the deal. Success fees are a set percentage of the transaction value — typically 3%-5% for deals under $10 million, and a lower percentage as the deal size increases. Sometimes, there will be a tiered structure, where lower percentages will apply for higher amounts. Although it might seem like a lot of money, a good way to look at it is that investment bankers are incentivized to maximize the transaction value of your business — benefitting you as well as them.
Why would an investment banker choose not to work with me?
Like any commissioned salespeople, investment bankers have to allocate their limited time to the clients who are most profitable to serve. Keeping in mind the length of the sales process, it’s important for them to choose wisely.
Let’s examine two potential deals an investment banker might have to choose between: one company worth $50 million and another worth $10 million.
For the $50 million company, the investment banker might take a 2% commission, or $1 million. There’s a 50/50 chance that the deal won’t happen and the investment banker won’t collect any commission at all, so $500,000 is a more accurate number when considering total income across multiple deals. Assuming the deal requires about 1,000 hours of work, that comes to about $500 an hour — a reasonable rate similar to that of a law firm.
For the $10 million company, the investment banker might take a 3% commission, or $300,000. Fifty percent of that is $150,000, or $150 an hour. Given a choice of spending the next year on one of those two deals, which would you choose?
In addition to size, other factors can cause investment bankers to turn down a deal. If a deal is unusually complex, or there’s indecisiveness or disagreement on the part of company stakeholders, or the story of your deal will take extra time and effort to explain, those are all reasons why a traditional investment banker might opt to focus their efforts elsewhere.
How is Oaklyn Consulting different from other investment banking firms?
If you feel you need an investment banker’s help but can’t access it, Oaklyn Consulting provides white-glove investment banking service on an hourly basis as a consulting firm.
Unlike traditional investment bankers, we don’t take a commission, so we’re not tied to the success of a deal. We work on an hourly basis, with budgets agreed upon beforehand and no monthly minimum fees, which allows us to be completely objective in the consultative advice we provide to clients. Our rates are comparable to those of lawyers, and we bill you for our time and help you as much as you need.
Deal complexity doesn’t bother us; we have decades of experience handling unusual and intricate deal situations. If you’re uncertain about the right path to take, we can help you evaluate your options, which may or may not include a sale. We want to help you make the right choice for your business and for yourself.
Perhaps most importantly, we’re here for you when you need us. We respond quickly and thoughtfully to emails and phone calls. You never have to feel like you’re not our top priority.
If we can be of service to you or somebody you know, don’t hesitate to reach out to us.
