Tips on How to Engage an Investment Banker - Scott Waxler
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Tips on How to Engage an Investment Banker

Tips on How to Engage an Investment Banker

In a previous article, I mentioned investment banking retainer fee conflicts and that the average closing ratio among U.S. professionals working with deals valued at $5 to $30 million is roughly 30%. I also mentioned that the average engagement fee for these deals is usually around $50k.  Nevertheless, I never met a business owner that would pay a retainer or engagement fee with only a success rate of 30%.  So what exactly do you do about this when it’s time to sell? My suggestion is listed below:
  1. Make sure you obtain a valuation from the prospect or banker before engagement.  It’s important to ensure the Banker explains the reasons for the valuation
  2. At times certain bankers may try and charge for a valuation.  In our experience, the banker should make the investment for this in order to “quote the job”.  Would you pay an auto mechanic to give you an estimate? Or what about a real estate agent for the value on your home?
  3. Find out from the banker the probability of closing the transaction at the valuation given
  4. If the probability is less than 70% – 80% than don’t even bother selling your Company because the work, exposure, and risk it too much for less than a 70% rate of success.
  5. If the banker is confident in meeting your target then ask “If you’re so confident in this process, why keep the retainer?”

The most common answers to the 5th question are usually:

  1. It usually takes 6-12 months to sell a business and during this time there’s a lot of expenses
  2. We need to understand your level of commitment before we commit all of our resources to sell your company

My opinion on these answers is:

  1. I wouldn’t use an advisor to help me sell one of the biggest transactions of my career if that person needed my retainer to cover their expenses
  2.  If your prospective advisor can’t see if you, the Seller, are committed then how can they decide if the prospective buyer is committed?  After telling this to your advisor they might come back with; “With nothing on the table what’s stopping you guys from switching gears at the last minute after we commit all of our resources to sell your business?” Well, there can be a few ways to solve this, one of which is to offer a break fee if the advisor delivers valid deals that meet preexisting target goals. If the advisor is an expert in structuring deals then he should be able to work out something with you that will meet both of your needs.
Now down to the basics.  Everything we stated above is fine and dandy but the fact still remains and that is most advisors in the lower middle market can’t afford the due diligence to give them the confidence to remove the retainer fee. Let’s put aside the red flags an engagement fee can trigger.  For one if the advisor doesn’t have confidence they can succeed, at least 70% as we mentioned, then I don’t recommend to any business owner they hire that advisor.  The worst possible thing that can occur is you go through the selling process a few times and this is one thing you want to do right the first time.  Marketing a second time can be costly and a nightmare, but this will be discussed in a later topic.

 

After everything we’ve gone over if you find you still can’t get out of a retainer fee and still need an Advisor then at the very least make sure you are warm and fuzzy after you’ve heard all the answers to your questions from the Advisor.  My belief is you’ll be surprised by the answers you’ll hear.  The worst thing that can happen is that you learn the mindset of how advisors think which may be a part of one of the most important deals of your career or even life.
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