When it comes time to sell your business, you may decide you don’t need to turn to an investment banker to help you with the transaction. It seems logical – who could possibly know your business and industry better than you? From a business standpoint, avoiding the costs of hiring an investment banker makes fiscal sense, doesn’t it?
Not necessarily. While you benefit from avoiding the costs of an investment bank, you may lose out on the advantages.
Before you assume it’s best not to work with an investment banker, consider the following reasons why it may be worth your while. Keep in mind, if you stand to gain more than you stand to lose (in other words, you expect to make more than the consultant costs you) then isn’t an investment banker worth considering?
Investment bankers are prepared for the unexpected
Private equity investors make a habit of saying no early and often. They have to, because one bad investment could be devastating to their careers or future earning potential. In fact, throughout the entire process, investors are closely studying the risk-reward ratio, just in case they discover something that convinces them to reject the deal.
An investment banker has extensive experience with investors, and can anticipate any issues that might arise down the line. They know how to keep investors from ever saying no.
During the life cycle of this transaction, you can’t afford to make any mistakes. Investors are looking for reasons to back away, which is why it’s worth your while to work with a consultant who not only anticipates obstacles, but knows how to nip them in the bud.
Investment bankers can effectively communicate with investors
One of the reasons you might believe an investment banker isn’t needed is because you know how to communicate with people in your industry. You know what they want; you know what motivates them. But while your knack for communication works with your clients and customers, it may not translate well to investors – who speak their own language. Inversely, investors interested in your business may not understand your industry jargon, and could use an intermediary to bridge the communication gap.
Investment bankers work as an effective intermediary. These consultants can translate the investors’ concerns and needs to business owners, and can properly educate the investors on information related to your industry.
This can do wonders for eliminating communication faux-pas – on either side of the table.
Are you really objective about your own business?
Investors dissect your business from every possible perspective. As much as you believe you can be objective, it can be really challenging to notice any slights or imperfections, because you’ve been so closely involved for so long.
Investment bankers can take a step back and see the things you may not even notice. Think of it like studying moles on your body. You may have grown so accustomed to certain spots or marks that they fly under the radar. An investment banker is there to help you pay notice to all of these marks, because an investor surely will notice.
Because professionals should work with professionals
As successful as you are in business, chances are you’re not a professional seller. That’s not where your time and expertise has been committed to. The issue with that is that investors are professional buyers. This is what many of them do for a living. Chances are they bring with them a team of experts helping them to choose the best possible opportunities on the market.
It only makes sense, then, that you come equipped with your own team of professionals. That way when it’s time to get “in the ring,” you’ll be fully prepared to take on whatever the potential buyer throws your way.
What to consider before choosing for – or against – an investment banker
Investment bankers can seem like a costly investment for you. Many use a price model similar to the “Double Lehman Formula,” which equates to 10% of the first million, 8% of the second million, 6% of the third million, 4% of the fourth million, and 2 % of everything after that. Bankers may also charge a retainer while preparing your company for market.
Yes, this does seem like a substantial investment, but not if, in the end, you reap the rewards. Furthermore, it’s important to consider whether you have the time or expertise to handle the sale on your own. In order to effectively place your business on the market, you must:
- Be able to present your company’s history and future creatively to minimize the risk of investors discovering something that will have them back out.
- Be able to continue to operate your business as you manage the duties of selling it.
- Have the time, network, and experience to create an auction.
Ask yourself this: does it matter to you, your fellow shareholders, employees or family that you got the best price for your company? If so, then you may want to strongly consider working with an investment banker.