Dealing with Investment Bankers (#98)
/In this podcast episode, we cover the reasons for using an investment banker, as well as tips for how to spot a good one. Key points made are noted below.
Role of the Investment Banker
If you want to either raise money or sell your company, there’s a good chance that you’ll be dealing with an investment banker. An investment banker acts as an intermediary between you and either potential investors or acquirers. Their job is to link you up with the other party, and consummate the deal. They have a couple of areas of expertise that makes them really valuable. One is that they know how to translate what your company does into a package that someone either wants to invest in or buy. You may think you can do this on your own, but they do it all the time, and they know what works best.
Part of their assistance here is in doing a really fine presentation. The investment banker should create the PowerPoint presentation for you, and have several dry runs of the presentation with the management team. Please keep in mind that you do the presenting – at most, a banker may do an introduction at a presentation, but after that, he pretty much sits down in the back and answers e-mail on his Blackberry and just tries to stay awake.
And their other area of expertise, and this is a huge one, is their contacts. They know tons of investors and acquirers – in fact, this really is their business. They’re routinely getting in touch with nearly all of the senior management of companies that do acquisitions, and they probably know almost every fund manager who might want to invest.
And by the way, part of this is through junkets. The larger investment banking houses routinely put on things like multi-day golf tournaments and bring in really good speakers, and then they invite all of these buy side people to attend for free. For an investment banker, this is all part of the job.
And the final area where they provide assistance is in closing the deal. Now, they are not your attorneys. But – they handle most of the major negotiation points with the other party, and they’re pretty good at improving the terms of the deal.
Investment Banker Fees
This all sounds great, but what do they cost?
An investment banker is very expensive. If you’re trying to raise money, you’d better expect the banker to take at least 6% of however much you raise. Though if you’re raising a lot of money, the percentage goes down. If you’re selling a business, the minimum fee for a reputable firm is usually around $1/2 million dollars, and they’ll make even more money if they can sell the company for more than some pre-determined price. And on top of that, you can expect a monthly retainer that’s generally around $10,000 a month.
This sounds like a lot. Actually, I think a good investment banker is worth every penny. In a really sweet deal, they may be able to line up the exact investor you want, or the perfect acquirer, and it may seem effortless. But keep in mind, without the banker, you never would have found that other party. And also, the retainer really isn’t that much money, so the banker is working almost entirely on contingency. If you raise no money or don’t sell the company, then the banker only gets the retainer. So they have a really good incentive to perform.
How to Obtain Investment Banker Services
So at this point you might think – grudgingly – that an investment banker is worth it, and you’ll go out and get one. Well, that’s not quite the way it works. A good investment banker selects you – not the other way around. One banker told me that he interviews an average of 30 companies for every one that he agrees to work for.
And there’s a good reason for this. An investment banker works long hours, and he only makes real money if he performs. So he doesn’t want to work for a company that he knows in advance is going to be a tough sell. Instead, he wants the easiest sale he can possibly make. And for that reason, you can expect to meet with an investment banker, and decide to hire him, and then find – much to your surprise – that he doesn’t want to work for you.
The Fund Raising Time Line
So let’s say that you reach an agreement with a good investment banker. What kind of time line are you looking at to raise money or sell your business. It’s still a long time. The banker may take a month to create a really good presentation, and then another month to line up a meeting schedule, and quite possibly another two months after the meetings to close a deal.
And if you’re talking about selling your business, then add another two months. It’s not that an investment banker isn’t efficient. It’s just that there are lots of third parties involved, and so you have to work around a lot of schedules. So even with a really professional banker, it’s still going to be a slow process.
The Best Investment Bankers
Now, what makes a good investment banker. Essentially, it comes down to how comfortable you feel with him. Or her. You tend not to hire an investment banking firm, you tend to hire the specific partner or vice president who’s going to work with you.
I happen to really like a vice president who works out of the Baltimore office of Stifel Nicholaus. I just like him, and I think he’s really competent. It doesn’t necessarily mean that I’d be as happy working for someone else at a different office of the same firm. So ultimately, it’s about the personal interaction.
But there are some other indicators. A big one is who takes responsibility for the PowerPoint. Smaller investment banking firms or one-man shops will just send you a few copies of presentations done by other companies, and tell you to put together something like that. That’s not so good.
A good banker will assign a specialist to create your presentation, and they will construct it for you. It not only shows an advanced level of professionalism by the banker, but it leads to a much higher-quality presentation.
Another indicator of a poor investment banker is not being selective with the target list. A poor investment banker doesn’t necessarily know everyone on the buy side, so he just sprays a teaser letter to every possible investor or acquirer. The banker does this because then you owe him a fee if you eventually do a deal with anyone he contacts on your behalf, even if you don’t do the deal through that banker.
It also harms you, because now your name is plastered all over the buy side, and if you don’t do a deal right away, then it’s kind of difficult to go back and re-contact everyone in the industry a few months later for a second try. They wonder why you couldn’t close a deal the first time.
And another bad sign is when the investment banker tries to ram a bad deal down your throat, just so he can earn his fee. He is certainly obligated to tell you about any offer made, but if he actually recommends one that’s clearly not in your best interests, then shut him down and look for a different banker.
And a final indicator of a poor investment banker is a badly organized road show. If the banker doesn’t have directions to the next meeting, or doesn’t have phone numbers for whomever you’re meeting with, then he is not doing his homework.
As you might have guessed, I’ve seen all of these issues with investment bankers. Unfortunately, these are problems that you only see after you’ve hired the banker, so if you find a good one, it’s best to stick with him for later deals.