As a follow-up to our prior post on the topic, below are a few key additional questions that sellers can consider when evaluating investment banks in order to find the bank that will ultimately meet the sellers’ needs. These questions are excerpted from a recent article authored by Krist Werling, Scott Becker and me.
One additional question sellers should ask ia How many investor/buyer targets does the investment bank intend to contact with the request for proposal? More specifically, how many potential investors/buyers does the investment bank intend to contact at each stage of the process? Investment banks can very greatly in their philosophy of which and how many targets to contact. Some believe in disseminating the RFP to as many possible targets as are available in the industry whereas others chose to limit distribution to a few select potential investors/buyers that they believe would have the most interest and that would be the best match for you. You should ask how many targets does the bank intend to initially contact and sign confidentiality agreements, how many will receive RFPs, how many will be invited to management meeting and with how many will the bank negotiate offers/letters of intent? Investment banks can very greatly in their philosophy of which and how many targets to contact. Depending on your own sales philosophy, this is another way that you can distinguish among investment banks.
Within the spectrum of investors/buyers that the investment bank intends to contact, how many strategic buyers vs. financial buyers such as private equity funds will be targeted? Strategic buyers are existing players in the industry that may seek to purchase or invest in your business in order to expand an existing business in a strategic fashion, and this may be a more or less attractive option for you as a seller depending on your relationships with your competitors in the industry, your willingness to divulge confidential information to competitors, etc. Financial buyers often will be willing to ultimately pay a higher price for the business where strategic buyers are often more stream-lined in their acquisition methodology and thus more likely to close the deal quickly and efficiently. To this end, challenges can arise with investment banks when they have too high a comfort level in one part of the market vs another. For example, in one healthcare transaction for a small specialty hospital chain with outstanding earnings, a client hired an investment bank for the principal purpose of seeking financial buyers. There, the bankers spent the great majority of their efforts with strategic buyers seeking, in the client’s view, the easier close but not necessarily the maximum price. Ultimately, the client perceived that it already knew each of the strategic buyers and that pricing from the strategic buyers would not permit a deal.
Do the investment bankers understand why your company is ready to sell at this time? Have they worked out the background story of the sale – essentially explaining why, if the business is such a great thing, you now want to part with it? Buyers will want to know why you are selling and your story about why you want to sell thus becomes an important part of the process.
Do the bankers believe you need to take significant measures to get the business more fully in shape to sell at a maximum price and are you willing to takes these steps?
What is the investment bank’s philosophy with respect to the completion of due diligence and negotiation of the form of purchase agreement/investment documents before signing a letter of intent? In other words, is the investment bank comfortable with signing a letter of intent before diligence is substantially complete and before at least a rough form of purchase agreement is agreed upon? Investment banks have different philosophies on the wisdom of signing of letters of intent early vs. further long in the process and it is important you be comfortable with the bank’s intended approach although the determination of which negotiation approach will likely be as dependent on the negotiation power of the seller (i.e. on the strength of the seller’s business and interest it generates) as it does on the investment bank’s own philosophy.
What are the fees to be charged by the bank? Most banks will charge a retainer fee (which will be treated as a deposit on payment of the full fee) as well as a sliding scale fee based on achieving targeted outcomes.
Who at the investment bank will be contacting the potential investors/buyers? In other words, will be bankers that you meet with during the initial selection process and works with most closely at the senior leadership level actually be contacting the targets and doing much of the ground work? Likewise, will those particular bankers be present at management presentations and at other key discussions with potential buyers after initial contact is made?
What does the investment bank believe is the range of value for your business? Specially, what assumptions of earnings are used to generate the value range, what multiple of earnings do they anticipate an investor/buyer paying? Within the total purchase price, what does the bank anticipate will be the buyer’s split of cash and debt financing? Although it is important for you to know that the investment bank values your business and will strive hard to achieve the most lucrative deal possible, it is also important to insure that you are working with an investment bank that sets aggressive but reasonably achievable targets.
In addition to the questions raised in Part I of this discussion, these are just a handful of questions that we suggest companies consider when assessing the value of various investment banks. In Part III we will discuss a few remaining issues for sellers’ consideration when making this important decision.