Sellers often ask if they should hire an investment banker to represent them in the sale of their company. The role of the investment banker tends to be somewhat abstract. Many sellers do not quite understand the role of the investment banker when they engage one to sell their company, but certainly understand their role by the time the deal closes. So the answer to the question is the maddening: “it depends,” but in general, the short answer for most sellers is “yes.”

Selling a company without the assistance of an investment banker is like trying to undertake a complex car repair without the aid of an expert mechanic. Either way, the job may get done (eventually); however, without the help of a knowledgeable expert, it could take much longer than necessary, it could be much more complicated than necessary, and the results may be inferior. When it comes to selling a company, having an investment banker on board gives the seller confidence that the deal will get done right, it will close in a timely and efficient manner, and the result will be a higher-than-anticipated valuation with more favorable terms than they might have otherwise achieved on their own.

From the buyers’ perspective, the buyers want to know that the seller is a genuine, motivated seller. Sellers want buyer candidates to know that the sale of their company is a competitive process and that they are expecting a market valuation and market terms. In that regard, hiring an investment banker to help facilitate the sale of their company provides the following signals to the market:

  1. The seller is, indeed, serious about selling their company. The seller’s willingness to pay the investment banker’s fees suggests to buyers that the seller has “skin in the game” and is committed to selling their company.
  2. It is a sign of professionalism. Investment bankers vet their clients, undertake thorough due diligence, provide guidance with respect to the range of expected valuation outcomes, and provide guidance with respect to market terms. Buyers know this, and thus, sellers that engage an investment banker may attract more attention from higher-quality candidates than they might if they tried to sell their company on their own.
  3. It lets buyers know the deal is competitive. Investment bankers obtain top dollar and market terms for their clients by orchestrating an organized and competitive sale process. They have relationships with a broad array of potential buyers, including private equity groups (PEGs), fundless sponsors, family offices, and strategic buyers, that the banker knows have a specific interest in the industry and markets served by the seller. The banker will initiate conversations with many of those parties to compete for the acquisition opportunity, which will improve both the price and terms for the seller.

So what role does the investment banker play? Typically, the banker is an active and involved party throughout all four phases of the sale, from the initial diligence to the marketing of the company for sale to facilitating management presentations and negotiating Letters of Intent (“LOI”s) to the closing. A good banker will assist sellers with the following activities:

Phase I – The Diligence Phase

  • Valuing the business and suggesting a range of likely valuations and structures
    • The seller and the banker must agree in advance that the valuation and likely structures are within an acceptable range
  • Preparing the Confidential Information Memorandum (CIM) and no-name “teaser” document to market the company to prospective buyers
  • Researching potential buyers and building the list of qualified buyer candidates
  • Identifying potential marketing and diligence issues; introducing experts to address and/or manage those issues

Phase II – The Marketing Phase

  • Contacting buyers candidates and introducing the acquisition opportunity
  • Negotiating non-disclosure agreements (“NDA”s)
  • Distributing the CIM to buyers who signed the NDA
  • Answering buyer candidates’ questions
  • Requesting Indications of Interest (“IOI”s)
  • Inviting select buyer candidates to the management presentation

Phase III – The Management Presentation Phase

  • Preparing the management presentation
  • Facilitating the management presentations
  • Requesting LOIs from interested buyer candidates
  • Evaluating and negotiating LOIs from prospective buyers
  • Assisting with the execution of the LOI from the chosen buyer

Phase IV – The Buyer Due Diligence, Documentation, and Closing Phase

  • Opening and “populating” the virtual data room (“VDR”) with key documents to facilitate buyer due diligence
  • Managing diligence questions as they arise
  • In conjunction with the seller’s legal counsel, reviewing and negotiating terms of the definitive agreements
  • Assisting, as necessary, with closing matters — This can include a panoply of efforts unique to the transaction, although preparing a funds flow statement is universal to almost every transaction

An important benefit of engaging an investment banker to help facilitate a sale is that the banker and seller’s team (attorneys, accountants, etc.) can assist in handling many of the more time-consuming activities related to the sale process. Selling a business is often a second full-time job for the owner and their management team. Hiring an investment banker to quarterback the sale process can help deflect some of the effort, which enables the seller to focus on running their business. Make no bones about it though, there are certain activities in which the seller must be engaged such as preparing and organizing information in response to comprehensive due diligence requests.

All of the foregoing efforts are tangible. Let’s not forget about all of the intangible services provided by the investment banker, including serving as the seller’s “psychologist,” serving as a sounding board for the seller, providing reassurances throughout the sale process, and generally helping to keep the seller focused on the prize – the successful sale of their company.

We like to say “if not the banker, who is going to do all the work” that is related to the sale of a company? By rolling up their sleeves and lending their expertise to the transaction, bankers should create more value for their client via improved price and terms, which should more than offset the fees paid to the banker. An experienced banker will introduce qualified buyer candidates to the table, will help to keep the sale on course, and will maximize the likelihood that the transaction will ultimately close, and close in a timely and efficient manner. Working together, the investment banker and the seller can achieve a favorable outcome that ultimately achieves the seller’s objectives for selling their company.