One of your clear and obvious goals when looking to sell your business is to get the highest return possible. For years it’s been understood that the use of an investment banker greatly increases your chances of a higher return.
But that term – understood – can be used loosely. For what seems like decades, assessing the value of investment bankers was based on mere anecdotes, surveys and testimonials. But true assessment comes from the analysis of data, and until now, it seemed there was no data worth analyzing.
Luckily, that’s all changing. As our world becomes more and more entrenched in the value of data, it seems only fitting that business owners looking to sell can now turn to hard numbers to see the true value of working with an investment banker.
Getting behind the numbers
A rather intensive study conducted by researchers at the University of Alabama and Louisiana Tech University features more than 30 years of data on close to 4,500 privately held middle market businesses that were sold.
The study was able to demonstrate a deep divide between private sellers who used an investment banker, and those who did not. Simply put, private sellers who retain investment bankers receive higher acquisition premiums than their counterparts, regardless of the deal size involved.
For years, investment bankers have said that their clients can expect a 20% benefit in selling price. The numbers delivered from the study nearly mirror that. And even if you only see a 5% benefit on a $10 million deal, for example, you’re still getting $500,000 more than if you didn’t retain an adviser.
Why do sellers do better with investment bankers?
While having hard fast numbers to turn to is certainly a value to sellers (and a relief to advisers) it’s good to know the why behind the data. The study does well to explain why the businesses within the study achieved favorable results when working with an investment banker.
The study shows that investment bankers are able to greatly influence the attitudes and assumptions of bidders, while being able to engage multiple bidders simultaneously. This, in the end, leads prospective buyers to believe that they are competing with other bidders (even if there’s only one strategic buyer interested), giving the seller leverage during negotiations.
Investment bankers have the expertise required to make the transition process much smoother while being able to identify strategic buyers, evaluate a bidder’s offer, and manage negotiations across multiple bidders.
In summary, the authors of the study concluded that it’s not in a seller’s best interest to save money by not retaining an investment banker. The increased value of your business that you’ll see by acquiring an adviser will – more often than not – pay for any success fee, many times over.
That being said, sellers who believe that they’ll only see true value if they use a top-tier M&A advisory firm may be surprised to learn the the data proves otherwise. There is no sufficient evidence to suggest that private sellers who use a top-tier firm receive higher acquisition premiums.
Regardless, what does seem crystal clear is that there is true worth in retaining an investment banker in order to earn a higher return for your business. Any success fee associated with this working relationship will pale into comparison to the increased value your business will enjoy when it comes time to sell.