Articles
Retaining an Investment Banker, Lesson 1: How to Hire an Investment Banker
By Bill Snow
During the summer of 2016, I spent three days in New Orleans delivering half-day presentations about mergers and acquisitions (M&A) to groups of business owners and executives. My discussions included an explanation of the step-by-step process of selling a company, examples of the documents needed in a typical transaction, some insights on how to contact buyers, and some tips on how to negotiate transactions. I explained that in most cases, buyers far outnumber sellers and as a result, buying a company is far more difficult than selling a company. This is not to suggest, I added, that selling a company is easy. Finding a buyer might be easy, but finding the right buyer and getting a transaction done that makes sense for the seller is very difficult. Working with a knowledgeable and experienced advisor is imperative.
I did not want my presentations to sound self-serving, so I purposefully did not plan to talk about how to hire someone like me. And guess what? The number one question I received over those three days in New Orleans was, “How do I hire a good investment banker?” In addition, the attendees had numerous misconceptions about the work of M&A investment bankers. Person after person believed knowing a lot of buyers, industry experience, and some sort of extraordinary ability to get a high price were the key considerations when hiring an investment banker. This seven part article series explores many of those misconceptions and provides some guidance on what business owners should consider when hiring an advisor to sell their company.
Misconception: Knowing a Lot of Buyers Is Important
While knowing a lot of buyers is not a negative by any measure, it is not as important as someone might think. What does “knowing a lot of buyers” mean? Does that mean the investment banker is personal friends with all these buyers and attends social functions, backyard barbecues, and dinner parties? If that’s the case, then whose interests would be represented? The new acquaintance (the client) or the cadre of old pals (buyers)?
Does “knowing a lot of buyers” mean spending copious amounts of time researching and studying dozens of industries and hundreds, perhaps thousands of companies? Does the investment banker also spend large amounts of time on the phone discussing these companies’ strategies? While these are not negatives by any stretch, this is not realistic for a simple reason: The day (or week or year) does not contain enough time to effectively stay in detailed communication with dozens or hundreds of companies.
A person, or a team of people, can effectively “stay in touch” with only a small handful of companies. What value is gained by working with an investment banker who only works with a small number of potential buyers? This is not to say that investment bankers do not have contact with buyers. Of course they do; that is a natural byproduct of selling a company. And while genuine friendships may undoubtedly exist between the occasional buyer and the occasional investment banker – and nothing is inherently wrong with those friendships – those friendships are outliers more than they are common.
Reality: How the Buyer’s List Is Put Together Is Important
A typical question for investment bankers often is, “Tell me about your buyers.” This is a flawed question because investment bankers do not have different, unique, proprietary lists of buyers. Here’s the reality: Buyers are easy to find and easy to contact. Instead of trying to determine which investment banker has the best buyer’s list, owners and executives should ask the following questions:
- How do you create a buyers list?
- How do you contact those buyers?
The Research Database Matters
A capable investment banker will use Capital IQ, which, in my humble opinion, is the gold standard for research databases and is indispensable when putting together a buyer’s list. Capital IQ does two very important tasks. First, it is exceptional at unwinding corporate trees, which means contacting the right executives at the right entity is quicker and easier. Second, it enables research on an extremely granular level, ranging from SIC and NAICS codes to geography to revenue to market capitalization and much more.
In the hands of a skilled user, Capital IQ enables an investment banker to create a buyer’s list that will be virtually identical to other investment banker’s lists. The days of having unique, proprietary lists are long gone. The Internet is the great leveler. Well, that and the ability to afford an expensive database such as Capital IQ. If you are considering an investment bank that does not use Capital IQ, they probably do not have the right resources to do a good job.
Knowing How to Contact Companies Also Matters
Having a good list is one thing. Knowing how to contact companies is another thing. That said, most companies – and all private equity firms – are acquisitive and want to make acquisitions. They want to be contacted by companies for sale. Knowing what to say and how to find the right person to speak to are the imperative skills needed when considering hiring an investment banker. Here are my techniques to do that.
The first step when trying to find the right person to speak to is to seek out the person with “corporate development” in the title. Corporate development means, “I buy companies.” This differs from a similar but totally different title of “business development,” which means, “I want to sell you something.” If the company does not have a corporate development person, then the most likely targets will be the owner, the president/chief executive officer, or the chief financial officer (CFO).
Having techniques for getting past phone screeners is also important. Numerous times over the years, when I asked, “May I speak to the person who takes the first look at acquisition opportunities?” the receptionist responded, “We don’t do that sort of thing.” I handle that comment by asking, “So, you’re the final decision maker for acquisition opportunities?” Then I shut up. I always get routed to the right person.
Navigating the really big companies (Fortune 500, in other words) is a different beast. Often, they will have a corporate development person listed in Capital IQ. Sometimes checking LinkedIn will yield a good result. But if a corporate development person cannot be found, the most likely suspect will be the CFO. However, the CFO isn’t going to take a cold call. This is my workaround: Ask for the office of the CFO. That means you will be routed to the CFO’s assistant. Simply tell the assistant “I’m representing a company for sale and we think it could be a good fit with your company. Who on the CFO’s staff takes the first look at acquisition opportunities?” You’ll be immediately routed to the right person.
This is the sort of nitty gritty detail you need to hear from your investment banker. Knowing people is nice, but that doesn’t automatically open doors in the M&A game. Knowing how to ask the right questions of the right people will get those doors to open.
And if the investment banker continues to tout the great, proprietary list of buyers as their differentiator, ask to take a look. Specifically, ask to see the contact information. If you see a lot of general email addresses (e.g., “info@” and “sales@”), be wary.
Conclusion
Instead of asking, “Tell me about your buyers,” business owners and executives are encouraged to have prospective investment bankers describe their process of creating a buyers list and how they go about contacting those buyers.
This is Lesson 1 of a seven part series about hiring an investment banker. In Lesson 2, we will examine the importance of industry experience when considering which investment banker to hire.
Link to Lesson 2: The Importance of Industry Experience
For more information, please contact the author.