All professions have become increasingly specialized over the last several decades. We have doctors, engineers, scientists, and yes, investment bankers, who have developed highly selective skill sets for specific applications.
Choosing an investment banker to sell your business is not a choice to be made lightly. In addition to familiarity with the particulars inherent in an industry and the actual sale process, an investment banker’s knowledge, experience, and advice can have significant influence and bearing as to a company’s valuation, its competitive profile, and its ultimate sales price in a transaction.
As private business owners rarely have a need to develop an investment banking relationship for their companies until a sale, merger or acquisition scenario presents itself, making a determination as to which investment bank to choose is crucial. Since the investment bank will likely be an intimate, but temporary relationship, similar to dealing with a surgeon, there are questions that the prudent business owner may wish to ask in order to make an informed selection.
Large, Medium, or Small Investment Bank?
Investment Banking firms can be loosely categorized as Large, Medium and Small sized, with breadth of services often, but not always, proportionate to size.
Bulge Bracket Firms
Large investment banks are also referred to as Bulge Bracket firms. Most of them are located in New York’s Wall Street vicinity, and sport a very wide menu of investment banking services and capabilities. These can include, but are not limited to, securities underwriting, sales and secondary market trading, lending, research analysis, market making, and strategic relationships with prospective buy side clients. A Bulge Bracket investment bank with a global presence and an international clientele is common. Bulge Bracket firms tend to have departmental specialists in different business or product lines or industry coverage experts.
On the other hand, all of these services may be overkill for many clients, especially private, middle market companies, and do not come cheaply. Many large firms have a minimum transaction size of US$100-$150 million or more (and commensurate fee levels) for investment banking deals and cannot take on projects that fall below their policy thresholds. Additionally, unless your company has deep pockets to fuel an acquisition agenda, smaller, private companies can be at a disadvantage with a bulge bracket firm, since many of the institutional relationships they have are likely be publicly traded and/or on the buy side themselves, possibly creating conflicts of interest.
Specialized Boutique or Middle-Market Investment Bank
A specialized boutique or middle-market investment bank fills in the middle ground between the $5 million to $150 million range (or larger). Sometimes, the boutique investment banker has worked for and apprenticed at one of the larger investment banks having gained solid experience of mergers and acquisitions. While the resources and scope of a boutique or middle-market investment bank may not be as broad as a Bulge Bracket firm, the boutique investment banker may have a specialization within a particular industry or sector.
A boutique with an industry specialization offers clients a deep knowledge of the industry and access to a wide network to buyers and capital sources, which is vitally important for a prospective transaction. For example, if a client is in the energy industry, working with a consumer products expert is of no value – it is a mismatch of services. Do note however, that many middle-market investment banks remain as generalists; they may offer clients limited industry specialization and contacts.
Business brokers represent buy or sell side parties for transactions that are usually $3 million and under. They are often more generalists than specialists and may not be able to provide much in the way of due diligence on a prospective counter-party beyond personal relationships. Their approach is often to “list” the client’s business on various services.
Other considerations to bear in mind when selecting an investment banker might include:
1. Is there a past track record and history of closed transactions within the client’s industry?
2. Can the investment bank provide satisfied client referrals from owners of businesses within the same industry?
3. Does the investment bank take a cookie-cutter, one-size-fits-all approach or is it customized for the particular situation?
4. Is the deal size consistent with the experience of the investment banking firm? Will the client receive proper service and focus relative to the deal size?
5. Is there a personal rapport with the investment banker (after all many hours will be spent with this person and the team), is there trust, will this investment banker provide good advice?
6. Are fees reasonable?
Choose wisely; no need to rush a decision. The ultimate difference can be substantial at the end of the day, not just in terms of value realized (deal values often swing in millions of dollars), but in peace of mind.