The owner of a business typically needs to make many extraordinary decisions when deciding whether or how to sell the business. One such decision is whether to hire an investment banker to manage the sale process. The most effective and efficient sale processes often are managed by investment bankers. Hiring an investment banker may not be the right decision in every instance. However, the fact that an owner is effective (even fabulously so) at running his or her business does not mean that he or she knows how to effectively or efficiently market the business for sale. Accordingly, serious consideration should be given to hiring an investment banker whenever contemplating the sale of a business.
If the decision is made to hire an investment banker, there are many things to consider when structuring an appropriate arrangement for the engagement. Some important items are as follows:
- Objective. The most important item is to agree on the objective for the engagement. Is it to sell 100% of the business, or at least a majority stake? Do the circumstances indicate that it might be better to sell merely a minority stake, or to raise debt capital? Those are all different objectives that generally involve different types of investors. The owner and investment banker may have different thoughts about the appropriate objective. Accordingly, it is critical to have a candid and comprehensive discussion about objectives at the outset so that everyone is pulling in the same direction. Objectives can evolve over the course of a sale process. However the process generally will not run well if there is any confusion about the initial objective at the outset of the engagement.
- Transaction Participation. It is relatively common for investment bankers to have affiliates (or clients of affiliates) that could be interested in participating in the investment or acquisition side of a sale transaction, or for the investment bankers themselves to have such an interest. Depending on the circumstances, that could be positive or problematic. Accordingly, it is important to address that possibility at the outset of an engagement so that there are no misunderstandings or disagreements down the road if indeed any such participation opportunities develop.
- Fees. Owners tend to focus on the amount of fees associated with an engagement. That of course is important. However many factors come into play when structuring fee arrangements. The focus should be on making sure that the arrangement is appropriately tailored to the process objectives for the specific transaction in question. The percentages of the sales price for the success fee at the heart of the arrangement matter, but so do, for example, the associated valuation thresholds and timing requirements. One size does not fit all. However, with candor and thoughtfulness appropriate fee arrangements can be structured to provide a foundation for a mutually beneficial relationship.
There are many other considerations associated with structuring a relationship with an investment banker. The starting point is to thoughtfully consider the opportunity to engage an investment banker, and then to spend the time to set an appropriate foundation for a successful relationship when the decision is made to go forward with an engagement.