Articles
Retaining an Investment Banker, Lesson 2: The Importance of Industry Experience
By Bill Snow
In my previous article, I discussed the first misconception of mergers and acquisitions (M&A), the importance of knowing a lot of buyers. I will now delve into the second misconception: The value of having experience in a seller’s particular industry.
Misconception: Having industry experience is vital
As with knowing a lot of buyers, industry experience is certainly not a negative, but it is not the “end all be all” either. Why do we think industry experience is so important? Because it will somehow lead to a better transaction? A higher valuation? A quicker close? What special insight is learned from selling, say a distributor of HVAC equipment versus selling a manufacturer of car parts? What tangible bit of extra intelligence will be picked up from selling a food processor versus selling a marketing services company?
The answer: Not much.
The steps and processes to sell companies are pretty much the same regardless of the specific industry of the company. Scratch that. The steps and processes are exactly the same. When contemplating hiring an investment banker, the industry of experience that is most important is the industry of M&A. In other words, the business of selling a business is the industry experience that most needs to be examined.
Reality: “Clearing the market” is far more important than industry experience
“Clearing the market” means communicating with every viable buyer and ascertaining their interest level. That is done through careful and thoughtful preparation, high quality marketing materials, and running an orderly process. The M&A process, and how well an investment banker can run it, is what creates value. Here’s why:
First, a good investment banker will never put an “ask price” in the marketing materials. Second, buyers are easy to find and easy to contact. Third, buyers will make the initial offer. Having the buyer start the bidding process reduces the chances of leaving money on the table. And fourth, running a process means having multiple potential buyers active and involved. Having multiple buyers is a check against a “random sample of one” making a lowball bid. Being contacted by an investment banker is a signal that a process is ongoing. Interested buyers will know they will have to make a competitive bid if they want to have a chance to win the process.
An investment banker does not need copious amounts of work in a granularly specific industry in order to extract the best price and terms for the client. Industry experience in and of itself is not a guarantor of good results. Let me provide an example. Years ago I was doing acquisition assistance work for a client. During my calls to the companies of interest to the client, I left a message for one of the owners of a company in Charlotte. Unbeknownst to me, this particular owner recently hired a business broker to sell the company. The owner thought the broker was doing a great job because, as he later put it, “I hired this broker and the next day a really nice Yankee from Chicago called me and wanted to buy the company!”
The timing of my call was mere coincidence because the broker did not contact me. My client wasn’t on the broker’s list of possible buyers. That means the broker did a poor job of preparation. In my opinion, the materials the broker put together were amateurish and weak. And even worse, the broker never attended meetings with his client.
The negotiations were very difficult; both sides balked numerous times. My client threw its hands up in frustration and walked away, and just as I was able to get them to reconsider a transaction, the seller threw his hands up in frustration and walked away. I spoke directly with the seller and brought him back to the bargaining table. The broker was not involved in those calls.
I tried numerous transaction structures before finally finding one that both sides found acceptable. We eventually closed a transaction. The broker was AWOL throughout the entire process. But guess what? That broker is able to now claim “industry experience.”
Conclusion
Instead of asking, “Have you done a lot of transactions like mine?” business owners and executives should ask the investment banker about their process.
This is Lesson 2 of a seven article series about hiring an investment banker. In Lesson 3 we will examine how to enhance valuation. The previous article, Lesson 1, examined how to hire an investment banker.
Link to Lesson 1: How to Hire an Investment Banker
Link to Lesson 3: How to Enhance Value
For more information, please contact the author.