What do M&A brokers and bankers actually do?
If you own a business between $3m and $50m in revenue, chances are you’ve had business brokers and investment bankers calling you to ask if you’re interested in selling your company. But who are these folks and how do they actually help you sell your business? What do they charge? Are they worth the fees?
As you start to think about your exit, these are important questions to answer to see if choosing to partner with a banker is the right choice for you. Engaging these folks is expensive and knowing what you’re getting into before you sign away a piece of your company is critical.
If you ask a banker, they’ll tell you their job has three primary components:
1) To tell your company’s story to potential buyers
2) To find and manage interested buyers
3) To be your guide through the deal process
Investment bankers generally think they can do each of these three things better than you can and that the value that they are adding will mean a higher purchase price (and fee) for you.
Telling the company’s story
Much of the advertised value of an M&A broker comes down to how effectively they can tell the story of your business. In that process, they will likely want to meet with you several times to understand your role, what you’re looking for, and the history of the business. Keep in mind you’ll likely be charged an hourly rate for the privilege so be sure to keep your story concise and relevant.
The Teaser
All of the high level information you tell a broker goes into what they call a teaser, which is a one-page document that gets sent out as an initial prospectus to potential buyers. Every teaser is different but they generally include:
· High level financial information
· Information on geography, customers, and products
· A couple paragraphs of business overview
· What the owner is looking for from the transaction
This is the business equivalent of the one page document you might pick up at an open house for a real estate sale. Potential buyers use this to see if they are even mildly interested and if they are, they will generally be sent a confidential investment memorandum (CIM), which includes significantly more information.
The Confidential Investment Memorandum
Creating the confidential investment memorandum or CIM is where a lot of the fees you pay ultimately go. This is a 50 to 80 page document that tries to tell the full story of the business and paint it in the best light. In addition to the information included in the teaser, this will also include:
· A comprehensive industry overview
· In-depth customer profiles
· Breakdown of revenue into segments
· An in-depth profile of the team
· Growth opportunities
· Other company data
Although they are comprehensive, from the private equity side, a CIM is lucky to get half an hour of an analyst’s time. Having worked at a private equity firm, I can personally attest to the fact that they get sent perhaps a dozen CIMs per day to review. What ends up happening is that the analyst will review the overview of the opportunity and then skip directly to the financials and decide if there is anything disqualifying.
Some buyers have strict investing standards and won’t investment in money-losing businesses for example. The CIM would include that information and the potential buyer would be able to know in 5 minutes whether they are interested or not.
If there is nothing immediately disqualifying in the CIM, the potential buyer will want to schedule a call with company management to get their questions answered in real time.
The CIM is a good example of a document that, on average, probably does not justify the time or effort spent on creating it. However, I have seen some concise, high-quality documents that tell a comprehensive story and are well worth reading. I’d say that 80%+ of CIMs obscure rather than clarify the company and the other 20% are actually valuable. Either way, the creation of the CIM is standard in the banker/broker process.
At the end of the day, you’ll be telling a lot of the story yourself through management calls.
Finding and Managing Interested Buyers
Although the deal process isn’t that complex, someone does have to find interested parties and manage their interest and involvement. If you have a high-quality company and send it out to every one of the 2000 private equity firms in the United States, you’ll end up spending the next 3 months on the phone trying to weed out potential buyers.
Finding Interested Buyers
Many investment banks and brokers have previous relationships with buyers across a variety of industries, size ranges, and geographies and will likely be able to think of 10 potential buyers immediately.
However, this cuts both ways. If you sell your business, you’re doing a one-off transaction with a broker, whereas a buyer might be a repeat customer of theirs for years to come. Therefore, although knowledgeable on potential buyers, brokers are motivated to show deals to their best customers, even if it might not be the best fit.
I recently was tangentially involved in trying to find a buyer for a network of 50 dentists’ offices in the Mid-West. Because the banker already had prior relationships and was pushing a couple of repeat buyers to the seller, they wouldn’t even consider involving a potential buyer who owned dentists’ offices on the East Coast, despite the obvious fit and strategic advantage.
I was involved in a similar story at the private equity firm I worked for. We had three companies in a specific industry and were looking to acquire a fourth. We had submitted a bid to a banker for this company, who responded by saying they would run it by the seller but it was likely too late in the process to consider the bid. We later found out directly from the seller that the banker hadn’t even told the seller about our offer and instead the company sold to a private equity firm with no prior experience in the space. This happens all the time. Be careful.
If you are going to use a banker, it’s important to use one that you trust to include all interested parties in the process. At the end of the day, they should be working to maximize your value, not their own.
Managing the process
How do business brokers and bankers actually manage the process? It’s surprisingly manual as it exists today. As mentioned earlier, a broker or banker will reach out to buyers they think might be interested with the marketing documents they’ve compiled. They’ll then log the feedback they receive, often by simple excel spreadsheet, and make sure that qualified parties are included in the next steps.
This is called the Indication of Interest (IOI) phase as interested parties will submit an IOI to show their interest. An IOI outlines general terms of what a deal would look like, including approximate valuation.
After you’ve narrowed down the number of interested firms to 5–10, the banker will organize calls between you and the potential buyers. After those calls, they will generally solicit Letters of Intent (LOI). An LOI is much more specific than an IOI and names an exact offer price, timing of payments, current management tenure, and other terms. The assumption with an LOI is that, barring significant new information, those will be the final terms of the deal.
IOIs and LOIs generally look different depending on the firm submitting them and therefore it is the job of the banker/broker to compile them and allow you to make an apples-to-apples comparison between all the offers.
Overall, because the process is inefficient, a banker can provide value if they successfully manage a process and include all interested buyers in their initial outreach. However, if you have the connections to buyers, many aspects of the process are not hard to manage yourself if you want to save the fees of a banker.
Your Sherpa through the process
The last piece of value a banker/broker will offer is to answer your questions and be your guide. Although navigating the process isn’t all that hard, there are obscure issues that may arise. For example, the conversation over working capital to remain in the business is often surprisingly lengthy.
A banker/broker will be able to answer questions as they arise as they have likely been through the process before. If they are good, they’ll also be able to provide information on past transactions in your industry and give you a rough sense of valuation.
If you’re looking for significant hand holding, hiring a banker or broker to run your process might be a good option but make sure that they have industry experience and will connect you with the right sellers.
Do banker/brokers justify their fees?
So what does this all cost? For bankers and brokers in the middle market ($5m — $100m in revenue), hiring a banker or broker to represent you will likely cost somewhere between 2% and 10% of the purchase price. Generally, they will charge $10k+ per month in retainer, a success fee that scales with purchase price (known as a Lehman fee), and a per-hour cost.
On a $20m enterprise value company, this can end up being between $500k — $1m. Keep in mind that the success fee you’re paying is going to be your peak equity value in the business. At the end of the day, investment bankers and deal brokers cost a lot of money and aren’t for everyone. Interview your broker before you sign to determine whether they are worth the cost.
Bottom Line
A great banker, with industry expertise, who includes all necessary people in the deal process, creates concise, useful marketing documents, and doesn’t charge you an arm and a leg is rare. From my experience, the majority of bankers and brokers in the middle market incentivize owners to sell with promises they can’t deliver on. However, if you do find that rare shop, a banker can be worth the price.
At the end of the day, the deal process isn’t that hard and the biggest barrier for a seller is knowledge of the process and connections. That’s why we founded Quiddity, a service that connects you with top-tier buyers for free. If you think that you manage the deal process yourself, check us out before you give away 3%+ of your company to a banker or broker.
Contacting the firms who’ve called you over the years isn’t a bad idea either. At the very least, you can get an idea of their deal process and better understand how M&A in the space works.
Finally, making sure you do your homework on potential brokers and bankers is crucial. The costliest mistake you can make is settling for a recommendation from a friend in another industry or geography without first interviewing the broker to make sure they are qualified to handle your transaction.
Business owners have to choose what is right for them. Whether it’s owning your own deal process and using a service like Quiddity to get connected to potential buyers or hiring a banker and taking a step back from the process, each CEO has their own comfort level.
Explore the options before you commit to anything. Selling your business is the biggest (and potentially last) deal you’ll ever have to make and should not be taken lightly.
