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It is a question that many business owners will inevitably ask when considering a partial (bringing on a financial partner) or full sale. For businesses in the middle market, broadly defined by enterprise values between $10-$250 million, it is not uncommon for sellers to “go it alone,” enlisting only their attorney to complete a transaction. Maybe they have received inbound interest from a few potential buyers or have previous M&A experience from making acquisitions themselves. Or perhaps, they simply want to avoid paying a fee at the end of the transaction.
Investment bankers will happily tell potential clients all the ways in which they provide value in a transaction. But what empirical data exists for sellers to determine how useful an investment banker truly is? A research study conducted by the University of Alabama and Portland State University that reviewed over 4,000 transactions over a 20-year period sought to determine exactly how, and if, the presence of an investment bank affected purchase price. The study found that sellers who used an investment bank saw valuation premiums of approximately 25% over those who did not. Additionally, virtually all of the sophisticated institutional sellers, who would reasonably have the skills and expertise to market and sell their own portfolio companies, still chose to be represented by an investment bank. Given their understanding of the M&A market and its complexities, institutional investors understand the significant return on investment that comes from hiring an investment banker.
Another study out of Fairfield University surveyed 85 owners who had sold their businesses for between $10-$250 million. Out of a collection of different services that an investment bank provides, the sellers were asked to rank each on a scale of 1-5, with one being the least important and five being the most important. The figure below shows the average score of each service.
The most valuable service that the investment bankers provided, according to owners who had recently sold their businesses, was managing the M&A process and strategy. In the middle market, transactions typically require six to nine months of intense preparation, deal marketing, negotiation, and due diligence. An owner attempting to sell their business without a banker must manage this process on their own. A banker takes much of the work (and stress) off of the owner’s shoulders, while also providing invaluable strategic insights gained from prior deal experience. Often sellers make the mistake of underestimating the amount of time and effort required to successfully close a transaction, even once a motivated buyer is already at the table.
According to those same sellers, the service of relatively least importance was identifying and finding a buyer. This may come as a surprise to owners who have yet to sell their businesses. Many investment banks, specifically those with a niche industry focus, will tout their knowledge of the buyer universe as the main way they provide value to the seller. After all, without a willing buyer there is no chance of a successful deal. Alernatively, many owners who have received inbound interest from a potential buyer may see no need to hire an investment bank, as they feel that they already have a likely buyer in hand. But in fact those who are on the other side of a transaction realize that finding a buyer is only one relatively minor facet of the investment banker’s role. A good investment banker will take the time to understand their client’s industry and approach a broad range of potential buyers, providing options to their client while increasing negotiating leverage. In this competitive tension, the best buyer rises to the top.
In choosing an investment banker, process management and negotiation skills will likely be more critical to a successful deal than familiarity with buyer. In reality, a banker with close connections to the buyer universe may find that their incentives are misaligned with their clients as they seek to complete multiple transactions with the same few buyers. The investment banker’s responsibility should always be toward their client, not toward ingratiating themselves with a particular bidder.
As investment bankers to companies in the middle market, our team has worked with over 220 owners to sell or recapitalize their businesses. An M&A transaction is the culmination of years, or even decades, of hard work and dedication toward building a valuable company. It is also a stressful and time-consuming process. Owners who choose to “go it alone” face an intense workload, limited negotiating leverage, and reduced certainty of close. A good banker will pay for their fee multiple times over with the valuation premium that comes from professional negotiation and the competitive tension of an auction process. If you are considering selling your business, consult the research around the value of an investment banker and have honest conversations with other owners who have gone through the process. As investment bankers to the middle market, we stand behind the value that we provide to our clients. Connect with us today to learn about how we work together to achieve a successful transaction.
ABOUT ALEXANDER HUTTON
Led by a team of former business operators and executives who have built and sold companies, Alexander Hutton is a boutique, middle market M&A advisory firm that has completed over 220 successful transactions. We offer a unique understanding of what it takes to run a business and an accessible team dedicated to client service. By running a high-touch, competitive transaction process for each of our clients, we are able to help them achieve their ideal outcome.
