When entrepreneurs are thinking about an exit, they typically wonder if they should hire an investment bank to help with the process. Will a bank bring in new buyers and better terms, or will you just be sinking money into the bank’s coffers? Since I’m often asked about the process, I thought I’d break down my advice on when and how to hire an investment bank.
The benefits: what an investment bank brings to the table
An investment bank creates value in two ways.
- One, they can establish a competitive M&A process that maximizes price. In short, you can get a better deal and more money than if you were negotiating or handling the process yourself.
- Two, they can introduce you to potential buyers outside of your network whom you never could have found otherwise.
In terms of the second point, keep in mind that only the top investment banks have these contacts and top banks will not consider a transaction deemed too small for their efforts. For the top notch global investment banks, this threshold is typically several hundreds of millions in expected outcome. Mid-market banks usually need an outcome of around $100m in order to play.
If you don’t have that kind of exit potential, you should consider a smaller, local player. They likely won’t have the best contacts to bring you new potential buyers, but they could still do a great job on the process side to get you the best deal possible.
What if you already have a potential buyer?
In reality, most companies are bought rather than sold. For example, a larger company makes an offer to buy one of its smaller partners or another startup that’s building something of interest. If this is your situation, you’ll need to weigh the pros and cons for hiring an investment bank:
- On the one hand, you can save the fees (which are typically 1-2% of the transaction amount, depending on the size of the deal) by not hiring a bank. After all, the potential buyer has been identified, the process has already started, and it’s most likely exclusive.
- On the other hand, you can consider that 1% fee an investment in order to keep the buyer honest and treat you well. In addition, the bank’s transaction experience comes in handy to speed up the negotiation and due diligence process. Alternatively, you can turn to your VC to help you navigate this as they most likely have been through many transactions in the past.
How to hire a bank
If you decide to work with an investment bank, it’s best to hold a “beauty contest” where each bank pitches you on how they would approach your sale: for example, how will they position your company and build their list of target buyers.
For each bank’s pitch, ask yourself the following questions. How well do they know our market and understand our value? How motivated are they to work with us: did senior people show up for the presentation or a handful of junior team members?
In the end, you’ll need to decide for yourself whether hiring a bank will bring value and whether that value is worth the bank’s fee.