Think Twice About Using A Banker When It’s Time To Sell Your Business

Investment bankers and business brokers are often retained to help sell a small business. In 20 years of early stage investing, I’ve seen them in action quite a few times. In many cases I came to the conclusion that we would have done as well or better without the banker. Here are guidelines to decide whether a banker will help, or not.

Bankers are not magicians, and they cost significant money: usually a monthly non-refundable retainer plus a percentage of the sale value if the company is sold, subject to a substantial minimum fee. They take several months to get up to speed. They effectively tell the world that the company is for sale. And I have seen them work away for 12–18 months and come up with nothing better than a fire-sale offer. The bankers with the strongest reputations are able to take only those assignments that, going in, promise a high probability of sale at a good value.

When big companies buy small companies, the transaction usually happens because the small company (the “target”) extends the acquirer’s capabilities: it brings a new product, new technology, valuable people, or (less often) access to new markets. Or, as a friend who moved into the big tech company world told me, sometimes targets are acquired because they are a threat to the acquirer’s business, and the acquirer wants to eliminate the threat (which is why the target sometimes quietly disappears).

The decision to acquire is usually driven by a line manager running a business related to the target. He will see the business fit first and understand it best. He has a budget for expense and capital and will need to bear any costs the acquisition creates. And line managers are usually the most powerful and respected people in a company. Corporate development people play a supporting role for the most part. They help manage the acquisition and integration process and bring specialized skills and contacts. They see the deal in the big corporate picture and have a quality control role. They work to know what the line managers are looking for and filter inbound deal flow. They are seldom the people who put their flesh on the chopping block and demand that a deal gets done.

Hence, the decision driver is most likely part of your market ecosystem: you already know her or him, or would if you network your industry sufficiently. In fact, the mostly likely acquirers are already your customer or a business partner of some kind: perhaps you sell complimentary products to the same customer. The next most likely group is direct competitors from whom you are taking business. Or perhaps suppliers who feel a need to acquire downstream capability.

The conversation with these buyers is an extension of your existing business relationship, and you can start that conversation at will, with care, of course. A banker does not really help here: s/he probably does not have a relationship with the line manager so the first call goes to the corp dev people, who are not fully up to speed on the fit between their company and your business and who are working on a big pile of other potential deals.

And, if no one in your ecosystem is interested, then it’s likely you need to develop the business further before you can achieve a good exit to them. A banker has no way to change this.

There are several situations where bankers can be a big help:

  • If there are likely buyers outside your ecosystem, the banker is better equipped to find them. This includes purely financial buyers (e.g., private equity funds that are not yet invested in your industry) and international buyers wanting to expand their footprint into your country, especially if they are from countries like China where the rules of business can be quite different. Bear in mind that financial buyers are usually looking for a low price. On the other hand, I’ve seen a banker add a lot of value by leveraging his firm’s global resources to find several potential Asian buyers and then tenaciously driving the process until the transaction closed.
  • If you have a credible offer in hand and want to drum up competing offers, bankers are well equipped to reach all the logical buyers quickly, and the fact that there is an offer on the table will speed you through the usual filtering process and cause the corp dev people to quickly run the deal past their line managers. Bankers are also good at creating a bidding process if there are multiple interested buyers.
  • If your goal is to sell your business to another entrepreneur who could come from outside your market, a business broker may know interested buyers that you don’t see.
  • A banker will help with structuring and negotiating the sale. If this is most of the help you need, however, there are much less expensive resources: good lawyers, consultants who specialize in this work, or experienced board members who can put in the time.

You might ask: “why do companies hire bankers so often?” They can be valuable, as outlined above. And, there are two other drivers. Small company CEOs are very busy and often feel that they don’t have the bandwidth to drive a sale process. And, hiring a banker feels like a way to make something happen: the banker promises (with wiggle room) to get the business sold within the timeframe of her or his process. CEOs and boards of directors often opt for a banker to buy this insurance and kick the moment of truth down the road.

Weigh the choice of hiring a banker carefully. Qualify the likely acquirers in your industry first. If that yields one or more expressions of real interest, consider whether you need a banker to finish the process. If there is little interest, consider whether a banker is likely to find an attractive offer from another party. Above all, be as honest and realistic as possible. The stakes are very high: you need to avoid chasing false hope, sell to the right party at the right time, and find the best realistic option for your company.

First posted @ on September 18, 2017.