A commercial, investment or corporate boutique bank advice on M&A. It’s part of their fee based business. However, with different success.
The kingmakers of famous mega transactions are well-connected boutique and investment bankers. They are the financial advisers that themselves made a record-year in 2019. 2020 and 2021 is a bit tougher due to Covid-19.
So how come banks may not be the best adviser for you when you consider to sell your business? A bank advice must be good, right?
Senior advisors are the once that connect CEO’s and venture capital firms with investors on equally senior decision-making levels. They are the tactical gurus that plot and adjust the plan on how to navigate to a deal-making point. They make sure that the company does not end up being a benchmark or runner-up for another transaction. They are the kingmakers and they eat and breathe corporate transactions, perfecting the art of deal-making.
However, unless you are a multi-billion-dollar revenue business with your own strategy team with tons of investment experience, banks are not for you. At least not when selling your business. Let me explain why.
The role of the financial advisor
Because the kingmakers are rare they concentrate to advice on the largest of the large multi-billion-dollar transactions. Occasionally they also front for their banks when the bank is prospecting for new advisory mandates for lower-tier transactions. Transactions in the range of tens or hundreds of millions of dollars. Other bankers in their 30’s or early 40’s become the real financial advisory project leaders once those lower tier advisory mandates are won.
A famous CEO of one of the major investment banks welcomed a group of entrepreneurs for dinner, telling them how excited he was to meet all these successful small business owners. He was used to working with large global multi-nationals. An elderly gentleman mumbled. His company revenue was indeed in the hundreds of millions of dollars whereas ‘the kid’ was a mere employee. True story.
This is what financial advisors will do
Executing transaction processes are well-documented within banks. As a small business owner, you will not have bank advice from senior bankers but usually from more junior associates. Maybe except when the bank is pitching for the assignment.
They will meet with older entrepreneurs and plan how to sell their business.
An even younger analyst will be responsible for collecting financial data, business plans and other documentations. Amongst the two of them they will put together a 30-100 pages long information memorandum. The power point presentation will describe the business for potential buyers. Your bank may also serve you with a business valuation or advise you to buy that service separately.
What’s expected from you? You as a seller is expected to engage your law firm. Your lawyer will draft and negotiate your share sell agreement, a new shareholder agreement and other related documents. You will also be asked to hire a due diligence advisor. His or her role will be to help you to prepare and to assist when potential buyer’s review and appraise your business.
Finally, your bank will also advice the team on how to follow the transaction process to ensure that milestones are met. These are the bank advice bankers do.
Why a bank advice may not be for you
If the transaction is closed successfully you will be charged a success fee based on the transaction value. This will be 2% to 10% of the sales value.
The bank’s rational is to incentives the advisor to do his best to make the transaction happen.
While the success fee concept appeals to some entrepreneurs, most of them struggle to accept requested success fees. In particular when they learn the size of the fees for what they feel is a limited service. To give away several percentages of the sales value of something that taken years to build.
A better word for banks financial advisor is transaction advisor. A bank advice is limited to executing a specific transaction, but may be less than what you are looking for. Strategy, life-timing, company preparation, personaly considerations etc is not part of the bank advice bucket list. It’s simply not what banks do.
Want to find on why banks insist to continue with the success fee pricing model? I will answer that question later in this article together with how much they charge and why.
A bank advice is limited in scope:
Banks are transaction makers and earn their revenues based on transactions being closed. They are not strategy advisors or owner counsellors,. Simply because that takes too much time and makes the transaction success fee uncertain. Banks are focused on making transactions happen and here is the problem for most entrepreneurs:
- It’s not uncommon for entrepreneurs to reconsider an initial merger or acquisition idea or simply be “caught up” in other things. Counselling of founders takes far too long time for a bank that gives advice on transactions.
- Ownership strategies, growth strategies and consequence analysis vis-a-ví key customers are advisory areas bankers know very little about. And because they are transaction focused, they focus on the transaction part. That is how they earn their fees.
- Strategy and tactics shifting in the midst of an ongoing process is nothing banks like, because they are so transaction focused. A shift in directions prolongs the process and, in worst case, makes a closing more uncertain. The exception are the rare and few kingmakers amongst bankers because they work with the very largest of transactions. Their fees count in tens of millions of dollars.
A better word for a financial advisor is a transaction advisor. That is what a bank advice, but it may be less than what you are looking for.
Building a business is a journey. Selling the business is another journey.
There are many reasons why someone may consider to exit their business. Age and the final retirement are common reasons. Another common reason is the business simply outgrowing the interests of the founder. Growing complexity and new leadership skills needed is an often cited argument.
Give advice on business strategy is not what bankers and most other financial advisors do for a living. Entrepreneurs will be highly disappointed when hiring banks to give them advice with such expectations.
Building a business is a journey while selling the business is another journey. Both takes years to travel. As a founder and entrepreneur, you will eventually choose a direction but will still not be entirely certain about your decision until the exit is completed. And you may even regret it afterward.
For financial advisors and bankers, it’s much simpler
Banks advice you to execute a transaction, assuming the decision is done and final.
Most transactions today involve professional investors that buy and sell companies based on pre-decided time-limited ownership periods, like venture capital and private equity. These transactions are relatively certain to be completed and therefore attractive to banks and other financial advisors.
Entrepreneurs on the other hand expect their advisors to guide them advise during several months of thought processes, reconsiderations, strategy options and eventually the transaction process itself. The later may even include new alternative processes, for tactical or other reasons, as the entrepreneur learn more during the process itself.
Bankers may call themselves advisors, but those that you meet are either salespeople, key account client success managers, that handles the day to day contacts, or transaction executers. Unfortunately, lacking own entrepreneurial experience, few bankers become successful in giving entrepreneurs insightful strategic advise, tactical advise or counselling.
You pay for the banks’ best people – without benefiting from them
Senior investment bankers are very expensive. The best senior bankers are talented artists in what they do. They excel in guiding and advising clients. The best senior investment bankers that are specialized mergers and acquisition project leaders earn themselves tens of millions of dollars per year in transaction bonuses and fixed salaries.
It’s a matter of supply and demand where banks usually can’t offer the same ownership and co-investor packages as venture capital and private equity firms can offer, competing for these talented bankers.
Those bankers are a necessity for the bank’s. They build energy and high standard through the entire corporate finance team. They set the trends and are the industry thought leaders. Above all, they’re well connected and open the doors to attract also lower tier, non-multi-billion dollar transactions such as yours. They are the lead magnets.
How much does a banks advice cost, in success fee?
Enough about the process. How much will selling my business actually cost me? Banks and smaller industry specialized corporate finance firms are the main providers of financial advisory for buying and selling companies
Venture capital, private equity, institutional investors and large multinationals are the main buyers of financial advisory transaction services. Entrepreneurs are the second tier of buyers and small mom-and-pop business owners are left to use business brokers that uses listings to sell businesses that are less valued and less complexed.
How much is the success fee?
The established price model includes a monthly project retainer that, accumulated, covers the cost for the financial advisors, including seasonal variations.
A success fees is charged on top of the retainer should the transaction be closed. The success fee is the profit contribution for the bank and covers some of the cost for those highly expensive senior bankers that the bank employ.
The common price-tag for a financial advisory success fee is 2% of the transaction value, plus several percentages, or minus a few tenth of percentage points, depending on the size of the transaction. The range is 1.2 – 10% in success fee.
The most senior and experienced bankers work on the largest transactions only where each billion-dollar transaction bring in 15 – 30 MUSD in success fees to the investment bank. The less, senior bankers are bound to the same price model and work on smaller transactions, hence generate smaller success fees.
Do banks not earn enought money otherwise?
The total earnings for a bank come from two buckets:
- Interest revenues, payment charges and fund management fees make up the bulk of any banks fixed revenue. They are relatively stable and predictable throughout economic cycles.
- Transaction fees from mergers and acquisitions, fundraising and initial public offerings are cyclical income. These are important to bank’s as they allows them to make more revenue in good times, like everyone else.
The financial advisory market
I have met quite a few entrepreneurs who our outraged about the size of these success fees and the limited advice they receive for them. Remember the entrepreneurs expectations, their need for thought processes and who the other buyers are of these financial advisory transaction services.
Entrepreneurs quite often question why a bank shall receive millions of dollars in success fees for a time-limited project management? Needless to say the entrepreneur has spent years to build the actual business. Is this fair?
Alternatives to seaking bank advice
It’s a matter of supply and demand. The key decision will be if to retain a professional mergers and acquisition advisor or not? Even smaller corporate finance advisory firms and independent advisors have attractive alternatives for venture capital and private equity.
Venture capital and private equity has less of a problem with success fees. They come from a logical point of view looking to exercise and are prepared to pay for services needed. They are less emotional and less tied to the business itself. Most entrepreneurs are not.
Do you need an advisor? It’s tempting to many entrepreneurs to lead the divestment project themselves. So do they even need an advisor?
Do you need an advisor?
You’re an entrepreneur that has spent years building your business. Your focus is on your customers, developing your products and optimizing operations with an eye on quality ppm’s. Should you hire banks to advice you to sell your business? Maybe.
The thought process:
The thought process behind deciding to exit your business or not takes years for many entrepreneurs. Identity, life, family situation and business partners are often tightly connected with the business. An advisor is not a necessity for the thought process. A coach or respected board member could maybe guide you, in other words, shorten your process if you so desire.
The strategy process:
The strategy is usually more complicated. Most entrepreneurs care about what happens to their business. Not least once it is sold. Having said that, everyone also likes to get paid as much as possible. Preparing the business for an exit process and value maximization is an expertise area where external advisors are money and time well spent. Not only is the value maximized but so is the likelihood to attract the best buyer for the business and thereby also security of transaction closing.
The transaction process:
The transaction process is the third step and the one that banks and other financial advisors focus on already from the first meeting. Remember, banks give advice primarily on transactions. This process can be divided into several sub-processes. Running the transaction process and its sub-process without an experienced advisor is doable, but something that’s almost certain to lead to a lower final valuation or no transaction at all. Even the most seasoned private equity investors use banks or reputable individuals to advice them in managing this process.
- One subprocess is to produce all necessary materials like due diligence material, investor memorandum, a financial data book, etc.
- Another sub process is to map who the potential buyers might be and, above all, how to best approach those potential buyers.
- A third sub-process is to decide if to try to sell the business bilaterally, in an auction process or an initial public offering.
- Finally, and maybe most importantly, tactical decisions along an evolving process are part of the fourth sub-process.
Should you ask banks for advice?
Should you ask your personal key account banker to offer an advisory assignment for you?
Yes, if you know what you can expect and if your prepared to pay for a success fee that most likely will pay itself from a higher sales price in a professionally managed process.
No, if you expect your advisor to help you with your thought process, your strategy process and all subprocesses within the transaction process.
Who are the alternative advisors?
- Large companies, investment firms and private equity are frequent users of management consultancy firms like McKinsey and Boston Consulting Group. They create a hypophosis that they then try to confirm. From there, they create a market understanding and high-level strategy. This isn’t an option for most entrepreneurs. The cost is several million dollars and the outcome is usually on such a high-level, that most entrepreneurs feel cheated.
- Independent one-man advisors could be a good choice for most medium-sized businesses. Most of these advisors have a particular field of expertise, like making information memorandum, valuations or advising on a strategy issue.
Almost all advisors and consultants have fancy presentation decks with pages full of thumbnail sized tombstones announcing previous reference transactions. Be mindful. Interview and look for chemistry. Most likely you will have to work with your advisor of choice for quite some time if you contemplate exiting your business. Be sure to make a good choice to secure your future and that of the business.