Preparing your company for sale: the role of investment banks

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After determining to sell a business, a potential seller must decide whether to hire an investment bank to facilitate the sale process or to rely on the company’s owners, management, and legal advisers to manage the transaction. Given that investment banking fees can range from 1 percent to 5 percent of the transaction value, usually depending on deal size, engaging an investment bank can be costly; however, the expertise an investment banker provides often increases the sale price for a business enough to offset the fees and net additional proceeds to the seller. Investment banks also provide a number of services that ease the burden of selling a business.
Outsourcing Time-Consuming Activities
One of the primary benefits of hiring an investment bank is that the bank, in collaboration with the seller’s legal advisers, will handle many of the time-consuming aspects of the sale process. These services typically include the preparation of marketing materials and financial models for the business, communication with potential buyers, coordination of the due diligence process, and even negotiating key business terms of the purchase documents. With the time from the commencement of due diligence to the closing of a transaction often in the range of three to six months, attempting to run both the sale process and the business to be sold can be a difficult task. The distractions caused by the sale process often lead to decreased performance of the business itself. With the recent uncertainty in the economy and fluctuations in the markets, buyers are increasingly requiring that a portion of the purchase price for a business be contingent on post-closing performance. That means a decline in business performance that begins during the sale process and continues following the consummation of a transaction has the potential to affect the proceeds to the seller. Hiring an investment banker to coordinate the process allows the seller to focus on its business and minimize the risk of adverse purchase price adjustments due to declining business performance.
Valuation, Terms, and Industry Experience
Another significant benefit of hiring an investment bank is its ability to provide realistic valuation information as well as the terms and conditions that are typical for such a sale. Given that valuation multiples and transaction terms can vary significantly depending on the type of business for sale, engaging an investment bank familiar with the seller’s industry and its specific business assures that the proposed sale price for the business is reasonable and that the terms and conditions of the sale are customary. An investment banker with industry-specific knowledge will also be able to produce marketing materials that are tailored to the buyers of a specific type of business and generally will be able to assist the seller with issues that commonly arise in the sale of a business in that industry.
A Greater Pool of Potential Buyers
The most common way in which an investment bank creates value for a potential seller is through the marketing of the business to a much broader spectrum of potential buyers than the seller could otherwise reach on its own. Sellers often think only of strategic buyers (companies operating in the same or similar markets as the seller) as a potential acquirer, and lack the knowledge or contacts to reach a broader buyer base. Investment bankers have relationships with a wider range of potential buyers, including private equity firms and companies the banker knows are looking to enter a new market. This allows the banker to present an acquisition opportunity to numerous potential buyers that are unknown to the seller. This expanded group of potential buyers greatly increases the chance of obtaining multiple offers for the business, which in turn may result in competitive bids and a higher sale price.
Negotiations
After identifying one or more potential buyers for a business, an investment banker often handles a significant part of the negotiation of the transaction terms, which can be beneficial to a seller in several ways. First, investment banks negotiate purchase agreements much more frequently than a typical seller and will generally be far more knowledgeable about the reasonableness of the buyer’s proposed transaction structure and terms. Second, allowing an investment banker to negotiate on the seller’s behalf may permit the seller to adopt more aggressive tactics without hampering the negotiations, as the buyer will often view the investment bank as the driver of the aggressiveness. This is particularly beneficial when a seller will remain involved in the business for some time following the closing and contentious negotiations could put a strain on the post-closing relationship. Finally, buyers who frequently work with investment banks will have a general understanding of what terms and conditions the investment bank will accept and may take more reasonable positions at the outset, which can facilitate a more efficient sale process.
Objectivity and Independence
Throughout the sale process, the seller of a business must objectively examine its alternatives and may need outside perspective and guidance to realistically assess its options. This is particularly true where there is a large gap between a seller’s asking price and the offers made—a circumstance seen more frequently in recent years. In these cases, investment bankers will work with the seller in considering the reasonableness of the bids and alternative transactions or transaction structures that could be more lucrative for the seller. Having this objective guidance can assist a seller in overcoming unrealistic expectations that could hinder the ultimate goal of selling the business.
Investment Banking Contracts
A typical investment banking contract will describe the services to be performed by the investment banker and whether the engagement is exclusive; the expectations of the seller to participate in the process; the compensation, which usually includes a retainer, reimbursement of expenses, and the contingent sale fee and how it is calculated; a term and termination rights; and indemnification provisions. Ballard Spahr’s Mergers and Acquisitions/Private Equity Group has extensive experience negotiating investment banking contracts for clients who want to sell their companies.
Copyright © 2012 by Ballard Spahr LLP.
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