Mark: One of the questions we often get when our clients embark on a sale process is whether to engage a financial advisor, also known as investment banks. They serve various roles under circumstances in which it makes sense for them to be engaged and others that it may not be necessary. What are some of those roles that financial advisors play in the sale process and what would be the circumstances under which we would advise our clients to engage one?
Justin: Yeah, so bankers can fill many different roles and banks often have expertise in different industries and so they can bring value beyond just the general role that they play. So, for example, banks can help you market your company. And so if you don't have, you know, a well-defined group of buyers, bankers can introduce you to potential strategics or sponsors to maximize your chances of getting a good value for your company. If you're engaged in a sell side process and again going to the industry specific expertise of bankers, having that expertise could give you more of an in with some of the companies that you'd be most interested in having conversations with and a relationship with.
The second thing that bankers can do is provide financial expertise. So as part of a sell side process, you're going to be asked to provide a ton of different types of financial information about your company and some of that information you may have on hand, some of that information you may need to prepare. And if you don't have that capability in house, having an investment bank with that resource could be an enormous benefit to release some of the stress on your internal team.
The third thing I would say is that they can function as a proxy or go-between between you and the buyer during tough negotiations. And if you've ever been involved in an M&A process, it can get fairly contentious and heated. So being able to have another advisor beyond your lawyers negotiating, particularly on economic terms, could relieve you and preserve the relationship for you on a post-closing basis because you're going to have to work with this buyer going forward.
And the last thing I'll say is that sometimes deals require specific types of advice or work product. One of those is a fairness opinion. So, for example, if you're engaged in a process or a transaction that requires a fairness opinion for various reasons, a bank would be able to provide that, and that's a necessity for certain types of deals.
Mark: What are the circumstances in which a financial advisor may not be needed in a given transaction?
Justin: Yeah. So basically everything I just said, if you just reverse it. So, for example, if you already have a buyer in mind, like a logical fit, someone that you've worked with, maybe it's one of your partners that you have a commercial relationship with, then you probably don't need to have a banker go out and solicit tons of potential buyers that really aren't going to be interested in your business.
The second thing is, if you have a deep financial bench and can call on them to provide the financial outputs that you need for a process, such as modeling, financial reporting, things like that, then you may not need to rely on a banker or third party for that expertise.
And finally, if you're comfortable negotiating yourself, if you have a good relationship with the buyer, the buyer’s CEO, and can do that and don't feel like you need to have someone else in the room or third party handle that negotiation for you, then maybe a banker isn't necessary.
Keep in mind, you know, bankers get paid as a percentage of transaction value, and so you need to bake that into your total expectations around what the proceeds will be, and sometimes it may or may not be worth it.