Retaining an Investment Banker, Lesson 7: How to Check an Investment Banker’s References
By Bill Snow
Similar to asking the right questions when interviewing people, asking the right questions when checking references is an equally daunting proposition. The strategy is clear, determine who would do a good job, but the tactics to make that determination are where the interviewer can run into trouble. Asking the wrong questions can inadvertently tip off the interviewee, who will then give the interviewer answers the interviewee thinks the interviewer wants to hear.
When devising reference check questions, the guiding light should be to ask questions that provide usable data which helps make a sound decision possible. This is easier said than done, of course. Without suitable advanced planning, the questions the business owner will ask might be of the “I think I need to ask this” variety. Below are five typical questions that should be avoided. I have contrasted them with five better examples.
Typical question #1: “What did they charge?”
This is a common question because what a service costs should be considered before deciding to hire any kind of advisor. But does the answer, any answer, to this question give the business owner a useful data point that will help make an informed decision?
Useful question #1: Was their work worth what you paid?
Price, in and of itself, does not provide much of a data point. If dinner for two people cost $100, does the price alone provide useful information? Of course not. A determination of what was included in that meal should be made. If the meal was a hamburger, fries, and soft drink from a national fast food chain, $100 would be an outrageous price. But if the meal was a USDA prime steak, lobster bisque, escargot, a salad, and a bottle of Opus One, served in a 4 star restaurant, $100 would be an absolute bargain.
The business owner’s focus should be on determining if the service was of a value commensurate with the price paid. Price provides only half of the story.
Typical question #2: How long did it take?
Because of countless vagaries with doing transactions, the length of time needed to close a transaction is an almost meaningless metric. A transaction that closes in six months might be a bad transaction. A transaction that took a year and half might be the best thing for the seller.
Useful question #2: Did they do what they said they would do?
Determining if the investment banker followed up, followed through, and accomplished what they said they would accomplish will go a long way in helping the business owner determine the efficacy of the investment banker’s work.
Typical question #3: Do they know a lot of buyers?
As discussed in Lesson 1 of this series, this question repeatedly comes up when business owners and executives are interviewing investment bankers. Unfortunately, this question does not provide a useful data point for a simple reason: Buyers want to hear about companies for sale and therefore, buyers are easy to find.
Useful question #3: Did they attend all meetings with the buyers? If not, why?
An investment banker should always attend meetings between its client (the seller) and any and all buyers. Leaving a seller alone with a buyer is a mistake. Buyers often want to meet privately with sellers and when they do, it is not for the seller’s benefit. Rightly or wrongly, buyers view an opportunity to gain unfettered access to the seller as a way to craft a better transaction…for the buyer.
Buyers are motivated by self-interest and nothing is wrong with that, of course. Sellers are wise to remember that they have a responsibility to themselves to craft the best agreement possible. Getting the investment banker out of the mix is helpful only to the buyer.
A good investment banker will make sure the meeting stays on track and stays on topic. The investment banker will handle difficult questions. And most importantly, the investment banker will make sure the meeting does not devolve into a transaction negotiation. Negotiations should be handled separately from any meeting involving the seller. If an investment banker does not attend all meetings between buyer and seller, the investment banker is not doing a good job.
Typical question #4: Did they get the highest price?
All else being equal, a high price is obviously better than a low price. But “high” or “low” are subjective. How can someone answer that question? Most likely, the seller accepted the highest offer, but what was the final price at closing? The same as the initial offer, or did the buyer whittle away at the price?
Useful question #4: Did the buyer try to re-trade the transaction and if so, how did the investment banker handle it?
Determining how an investment banker handled the dreaded retrade is far more important than trying to determine if the price was “high.” The reason to ask this question is to determine how the investment banker parried this question and to learn if the investment banker was able to maintain the agreed upon valuation.
Typical question #5: Did they do a good job?
This is yet another subjective question. Worse, it is a leading question. The answer, unsurprisingly, will be, “yes, they did a good job.”
Useful question #5: Could you have done this on your own without them?
The answer the business owner wants to hear is, “We could not have done what they did for us.” If the investment banker did a good job, the seller will realize how much work is involved in a business sale. The amount of upcoming work might not be evident at the start of the process, but in hindsight and if the investment banker did a good job, the seller easily should be able to see the value of the investment banker’s work.
If a seller says, “Well, we ended up with a good transaction, but we did all the work, the investment banker used the book we put together, they didn’t come to meetings with the buyers, and our lawyer did all of the negotiating,” don’t hire them.
Any references a business owner gets from an investment banker will be from people the investment banker knows will say positive things. In order to get information that will help the business owner make a decision, leading questions should be avoided. The business owner needs to determine the value of the investment banker’s work. How well did the investment banker follow up? What was the quality and organization of their process? Were they adept at negotiating? And, most importantly, what impact did the investment banker have on the final result?
This is Lesson 7 of a seven article series about hiring an investment banker. Lesson 6 discussed whether M&A is a listing service. The first article in the series, Lesson 1, discussed how to hire an investment banker.
Link to Lesson 6: Is Selling a Company the Same as Selling a House?
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