Don’t try this on your own
Most business owners have reason to talk with an investment banker maybe once or twice in their lifetimes (some might say, "fortunately"!). They might engage one to help them raise capital (debt or equity), or perhaps to sell their company when the time comes.
As a result, the entire process of selecting the right advisor is usually foreign to the business owner, and he or she probably doesn't feel completely comfortable going about the process of evaluating different investment bankers. Because of this uncertainty and possibly because they don't know what an investment banker does, the business owner might also even question the need to retain a banker at all.
In short, an investment banker is a professional advisor who helps business owners position their company to go to the capital markets to raise capital by selling equity or debt, or to sell the company outright. There are many "merger and acquisition advisors" in the market, but as a rule, a business owner should only consider those firms that are members of the Financial Industry Regulatory Authority (FINRA), which is responsible for regulatory oversight of investment banks along with the Securities and Exchange Commission.
Of particular importance, using a non-FINRA firm can put the business owner and his or her company at risk of violating securities laws and/or risk fines and penalties, and in the worst case, allowing a buyer of securities to unwind the transaction at a later date. (See Unregistered Finders: A Trap for the Unwary . Business owners can check on the status of an individual or firm's registration with FINRA by going here.
Why choose an investment banker at all, then? Many business owners choose to simply "self-medicate" and manage a transaction on their own, and don't really see the value of hiring an advisor. In some cases, this might work, but in our experience, selling a business is like any other business process - if you have a well-defined and proven process executed by experienced professionals who have managed the process repeatedly, you tend to get predictable, solid results. If you don't know about or don't use such a process, and you haven't sold equity or a company several times before, you also get predictably poor results in most cases.
Moreover, selling a business properly requires a lot of care and feeding - positioning the company in the market, attracting several potential bidders to keep all parties honest, managing the "soft auction", negotiating, managing due diligence and assisting with all of the paperwork in a transaction can be very distracting to a business owner who must also manage the business. Too many times, a business owner trying to manage his or her own transaction ends up losing focus on the business, which leads to poor operating results, which leads to renegotiation of the major deal terms, and ultimately results in a failed deal with a damaged business. Although investment banking fees are not inexpensive, the costs of not having professional help are usually greater.
Selecting the right investment banker is a lot like picking the right doctor, lawyer or accountant. A referral from a trusted friend or business advisor is a great start. Then, as you are interviewing potential candidates, ask them about their process - do they have a well-defined process that you feel comfortable with? Is it designed to attract the very best potential bidders for your business? Is it designed to preserve confidentiality? What is their negotiating style and does it match with your own personal style and/or preferences? Do they ask intelligent questions about your business which would demonstrate their grasp of business in general?
Then ask to talk with the banker's references (both prior clients as well as other advisors with whom they have worked), and ask the banker about prior success stories and prior failed deals. More important: Is the person you are interviewing the person with whom you will be principally interacting, or is your deal likely to get delegated to someone else who might be less experienced? If so, you need to meet that person because they will largely determine the quality of your experience and deal.
Finally, selecting the right investment banker for you and your company is ultimately about "fit". During your discussions and negotiations, what was your gut feeling about the individuals involved? Did they look at you and your company like another "deal", or were they truly concerned about what you are trying to accomplish? Finally, ask them about their fee structure - is it aligned with your success? Almost every investment bank charges some type of retainer as it is costly to bring a company to market, and the best firms simply won't take an engagement without a financial commitment from the client. As with any product or service, remember that you usually get what you pay for.
Chris Younger is Managing Director of CapitalValue Advisors, LLC (www.capitalvalue.net). Chris has over 20 years of experience in managing deals and business management, sales and operations. He was the co-founder and president of a 4,200-employee telecommunications company, has purchased and sold over 30 businesses as a principal and investor, and has been an advisor to hundreds of companies. Additionally, he is the co-author with David Tolson of the book "Harvest: The Definitive Guide To Selling Your Company," available on Amazon at http://tinyurl.com/48bewzt. He can be contacted at firstname.lastname@example.org.