Retaining an Investment Banker, Lesson 5: The Ask Price
By Bill Snow
In the previous parts of this article, I discussed three common misconceptions about mergers and acquisitions (M&A); The importance of knowing a lot of buyers, the value of industry experience, and how to enhance valuation. In the fourth part, I discussed the components of valuation. I will now return to a discussion about misconceptions. In this lesson, I examine how the “ask price” is determined.
Misconception: The investment banker should determine the “ask price”
Finding the investment banker with the best methodology for determining the value of a company is another misconception held by many business owners. And when I say, “best methodology,” I mean the “highest price,” of course. If this is the metric that is used, the one who lied the highest got the job, as the old saw goes.
Understanding the expected valuation of a company is important for business owners and executives, so conducting a valuation is a worthwhile exercise. But it is only an academic exercise. The best way to determine the value of an asset is to discover what someone will pay for it. And the best way to discover what someone will pay for a company is to run an orderly sale process that clears the market.
Correction: How the investment banker handles the “ask price” question is imperative
The flip side of determining the ask price is handling the “what does your client want” question. I call that the “ask price” question. The ask price question is often asked by buyers for two reasons. The first reason is simple: Why not? Asking what someone wants cannot hurt. You might get an answer and the worst they can say is “no.”
The second reason is perhaps more important: Probing. The buyer asks the question in order to ascertain the relative strength (or weakness) of the investment banker. It is a test. I know it is a test because I ask the exact same question whenever I represent a buyer and I talk to an investment banker representing a seller.
An experienced, prepared investment banker will have an immediate answer when asked, “How much does your client want?” Someone who is unprepared will stammer and stutter and will talk without saying much. This is dangerous because an unprepared investment banker might crack under pressure and cough up a number. And if your investment banker is doing that, you run the risk of leaving money on the table. Here is my answer:
“We put together a detailed book that contains all the information you’ll need to make an offer, please review it and put together an agreement that you can close, being mindful that we are talking with other buyers.”
If the buyer pushes me – and many will push – I have a further, more detailed answer:
“I’m not going to give you a number for a couple of reasons. First, I don’t want you to think I’m going to use your bid as a stalking horse and wave it in front of other buyers saying “this is the number to beat.” Second, if I give you a number and you submit an offer using that number but you were willing to pay more, I’ve done two things. I’ve left money on the table for my client, but more important for you, if another buyer bids higher than you, I’ve just given you bad advice.”
My approach usually settles the issue because I have deftly signaled to the buyer my level of sophistication in these matters.
Instead of asking, “What is my company worth and why is your methodology better than the other investment bankers?” business owners should inquire how the investment banker will answer the “ask price” question.
This is Lesson 5 of a seven article series about hiring an investment banker. In Lesson 6 we will discuss whether M&A is a listing service. The previous article, Lesson 4 discussed the components of valuation.
Link to Lesson 4: The Components of Valuation
Link to Lesson 6: Is Selling a Company the Same as Selling a House
For more information, please contact the author.