Stephen Grant
Dec 12, 2023
Consider how an investment banker can increase the overall size of the transaction value and find the right partner for all stakeholders
As the time for an exit approaches, you’re faced with an important question. When selling your business, do you:
Negotiate the sale on your own behalf?
Hire an investment banker to facilitate the sale?
Negotiating on your own behalf is a tempting choice because over the course of running your business:
You’ve come to understand your industry landscape well, including the goals and interests of potential buyers
You’ve been heads down in the business and feel you can market it better than anyone
You’ve received inbound interest from potential buyers and feel you have a competitive buyer pool to draw from
You may even have an offer on the table you feel excited about
Working with an investment banker like Resonance Advisory Group can improve the overall outcome of the deal. The following explains why selling your business with an investment banking advisor is the best option"
Why Selling Your Business with an Investment Banker Is the Best Option
Despite your robust knowledge of your industry and company, an investment banker can help you with activities that you don’t have the time, resources, knowledge, or network to execute on, ultimately resulting in a better outcome. As part of an organized deal process, a banker is best equipped to handle the following key aspects of a sell side M&A process:
Manage the due diligence process
Frame your business
Interact with buyers
Structure the transaction
Dedicate the necessary bandwidth
Negotiate terms with multiple parties
Find the right buyer
1. Manage the due diligence process
Potential buyers are prepared to do their homework on your company to make sure everything is in order. Managing the demands of buyers takes a lot of work.
Investment bankers help manage the due diligence process by:
Giving all parties access to the same data at the same time. Each potential buyer knows he’s competing against others, so certain parties will do their best to run ahead and choke out the process. A banker will set clear timelines for certain activities (e.g. management presentations, indication of interest deadlines, letter of intent deadlines, etc.) to keep everyone on the same footing. Before sharing any information with potentially interested parties, it is imperative that you work closely with your investment banker to adequatley prep internal documents (customer trends, financial metrics, etc.) to be ready to share with buyers under NDA.
Protecting data from uninterested or unqualified parties. Some parties who reach out are only fishing for data—perhaps because they’re planning to invest in a competing company or want your data for a portfolio company. Other parties aren’t able to transact and aren’t worth your time. A banker can help you root out these parties to protect your data from getting into the wrong hands and avoid executing an NDA with these parties.
2. Frame your business
You only get one chance to set a first impression with a potential buyer, so you want to make sure to appropriately frame the company’s products and metrics.
Investment bankers are experts in framing businesses to highlight a company’s strengths and minimize its deficiencies. With multiple deals already under their belts, bankers know what information buyers and investors look for and are able to anticipate questions that may come up during diligence. This expertise allows sellers to get ahead of any potential issues and form a concise story around trends in a company’s data.
3. Interact with buyers
Interactions between sellers and buyers are complicated because founders want to increase their value in the transaction but they also don’t want to burn unnecessary bridges with a potential future partner in the case of a transaction. An investment banker can help resolve this issue by serving as the intermediary in the transaction.
An advisor can:
Set the appropriate tone. When buyers see a banker is involved in a transaction, they know that means the process will be competitive. A competitive process means the buyer will need to put their best foot forward and won’t prevail in the process if they are low bidders.
Be tough when necessary. Sometimes a deal can hit a wall and you have to be tough on the terms of the transaction. Bankers are better equipped to fight those battles based on their role in the deal.
4. Structure the transaction
Carrying out a deal isn’t just about framing your business in a way that’s appealing to buyers—there is a lot of specialized knowledge about structuring the transaction that can affect the final outcome. The average founder doesn’t have this specialized knowledge.
Not knowing can be dangerous because the final terms of your transaction could affect your ultimate economic outcome when your buyer sells the business in 3-5 years.
Buyers are experts on how to structure deals, and can use that expertise to their advantage. Even if they tell you that they won’t work with you if you work through an investment bank, you can be certain that they hire advisors of their own for the buying process. Make sure you have expertise on your side of the court too.
5. Dedicate the necessary bandwidth
A major aspect of carrying out a deal is pure bandwidth. If yours is a company buyers are interested in, then you as the CEO or other senior-level member of the company are certainly very busy carrying out day-to-day operations.
Do you think you could find time to concurrently negotiate 10-15 offer letters? The bankers at Resonance Advisory Group dedicate 500+ hours of work per transaction to do just that.
Even if you could find the time, that’s time you could have spent improving the position of your business. The biggest risk during the process is underperformance of your company because your management team becomes distracted by the deal process.
6. Negotiate terms with multiple parties
Part of the deal process is negotiating with multiple parties in parallel including a mix of strategic and financial buyers (i.e Private Equity). The negotiation goes far beyond seeing who bids the highest price. While the most visible aspect of a deal is usually the headline enterprise value, a higher deal size isn’t necessarily better, depending on the terms of the transaction. Other important aspects of an offer that you will negotiate on include:
How your shares will be cashed out in the case of a liquidation event
A working capital target and the treatment of deferred revenue so that the acquirers don't receive excess cash at close outside of what's needed for ongoing operations
When and for how long a potential buyer will be granted exclusivity for diligence (typically included as part of the LOI phase)
Whether the management team and key employees will receive employment agreements
When applicable, the structure of an earn-out, including the up-front and contingent payments, primary performance metric (e.g. revenue, gross profit, EBITDA), length of the earn-out period, etc.
Public and private stock consideration, such as when a buyer offers stock in lieu of cash, or negotiating lock-up periods for when founders can sell their remaining stock
What percent of the transaction will be held in escrow and the length of the escrow period
Other items, such as representations & warranties insurance and taxation
Bankers see the full picture of a transaction and will negotiate on all relevant terms for all parties in parallel.
7. Find the right buyer
Experienced bankers understand the overall buyer landscape and can help you find the best go-forward partner whose interests and resources align with your own goals. An investment banker will be able to support finding the right buyer by helping you to:
Identify a buyer with the right cultural or strategic fit
Ensuring alignment between the seller and buyer is as important as any other aspect of a transaction. Some companies will forgo a transaction with a company offering a high valuation due to concerns that the buyer might be destructive to the business.
Focus on the most valuable buyers and investors
Investment bankers have the expertise and previous experience working with clients to determine which buyers and investors can get aggressive and pay premium valuations vs. those who can’t, saving you time from chasing the wrong partners.
Bring new buyers to the table
On the strategic buyer side, founders often incorrectly assume that given their in-depth knowledge of their industry they already know all the relevant strategic buyers. Founders may think there are only 5-10 relevant strategic buyers, but that is frequently not the case. A banker can add buyers to the process, creating more competitive tension and a better outcome for founders.
Finding the right buyer also affects your role in the company going forward. Following the transaction, what will be your go-forward role in the immediate future and beyond? The right buyer’s interests will align with yours, and a banker can help you determine alignment.