5 Advantages of Professional Investment Banking Services
Investment banking representation for middle market merger and acquisition transactions is absolutely critical. Even more than larger transactions, the middle market (typically transactions between $10 million and $500 million) can be terribly inefficient and difficult for business owners to navigate.
Let’s just think anecdotally for a moment. Professional financial sellers, or private equity firms, have universally seen the value that an investment banker brings to a transaction. As a result, virtually all middle market sales from a private equity group to a buyer occur using an investment banker. If the professional money guys know the value that the banker brings to the transaction, the business owner should follow suit.
If you don’t want to think anecdotally, we can refer to data for our analysis as well. A 2016 study by Michael McDonald of Fairfield University entitled, “The Value of Middle Market Investment Bankers” found that in 84% of the cases, business owners cited that the final sale price received was equal or higher than the initial sale price estimate provided by the investment banker.
Why is this the case?
1) The middle market is not transparent
There is no stock market to look to for current valuations or comparable transactions. Business owners, who are typically doing one transaction in their lifetime, cannot in any practical way know what their business is worth in a real sell-side transaction. Some business owners think they can get there by calling a few competitors and creating a “sale process” but that is too small of a universe to get any sort of reliable data on value.
An investment banker who works in the middle market, and preferably in your industry, will be able to tell you what value your business can demand in a well run sale process.
2) Buyers know that middle market business owners don’t have access to information
Why are there 3,000 private equity firms that claim to focus their attention on the middle market? Why, even though they have hundreds of millions of dollars that they must place into transactions, would they focus on a company making $2 million in EBITDA? Because they know that they will have a distinct advantage with these middle market sellers.
You will ruin their day if you are a business owner and you hire an investment banker to sell your business. It is the only way a business owner can have the same level of experience and market knowledge on their side.
3) There is no good way to tell the world that your middle market business is for sale
How does a middle market business owner go about finding a buyer? The easy way is to contact a few competitors, maybe you’ve gotten solicitations from some groups or you could ask your lawyer. Each of these methods will provide you with incomplete information on value.
Furthermore, dealing with unqualified buyers can eat up a business owner’s time and can seriously jeopardize confidentiality.
Your investment banker can add all of these groups to the buyer list and will undoubtedly include some buyers you would never have thought to include. The ability to find the right buyers and engage in a successful process with those buyers is one of the biggest influences your investment banker can have on the value of your company during a sale.
4) Middle market companies rarely have staff ready to gather the necessary information to sell a company
Middle market companies typically do not have the resources needed to prepare the financial statements and offering memorandum necessary to sell the company. If they try to prepare this information, it is usually unsophisticated and not complete.
One of the biggest areas where investment bankers add value is their ability to be your outsourced M&A department. They can prepare the information necessary for a sale and make sure that the materials are both appropriate for a transaction and position the company in the best possible light.
5. Hiring an investment banker will immediately add credibility to a seller
Hiring an investment banker is a very strong market signal. It tells buyers that you are not simply “shopping around” for a valuation and that indeed you are ready and willing to entertain a transaction. A seller that has hired a banker is a seller that is ready to do a deal.
It also tells the buyer universe that you are not going to be a pushover as it relates to value. Buyers know that when an investment banker is involved, there will be competition and that they need to present their best offer early in the negotiations or they will be passed over for another buyer.
The moral of the story is unless you have a middle market crystal ball, broad buyer market knowledge, and tons of free time, it’s better to rely on a banker to get your sell-side transaction complete.