By: Mike Bloom & Josh Bennett
There are at least six reasons an investment banker adds value to a transaction:
1. Preparing the Company for Sale
2. Coaching Owners
3. Identifying Potential Purchasers
4. Leading the Transaction
5. Negotiating the Transaction Terms
6. Structuring the Transaction
Preparing the Company for Sale – Investment bankers create long-term relationships with their clients before a transaction to help them prepare for the transaction process and safely exit their business. When preparing a business for a sale, a seller will be encouraged by their investment banker to eliminate personal expenses from the business, pay their taxes now, and use the additional cash flow to increase profitability, grow the business, and increase its value. Investment bankers will also help you optimize your business for the right type of buyer.
Investment bankers utilize their sell-side and buy-side experience to help business owners prepare detailed financial models and projections that give the buyer confidence about moving forward with a transaction.
The investment bank will also help business owners prepare for due diligence by working with your attorney to identify risk areas and ensure the data room is properly populated at the onset of the sell-side process to facilitate a speedy due diligence for the buyer.
Coaching Owners – Most business owners only sell a business once, so your investment bankers are poised to bring their experience managing transactions to coach you through the entire transaction with around the clock availability.
Identifying Potential Purchasers – Investment bankers leverage relationships in their professional network to identify many potential purchasers to facilitate a more competitive bidding process.
The additional depth added to the buyer’s list facilitates a more competitive bidding environment, increases the odds of finding a mutually beneficial transaction that works for both the buyer and seller, and helps the seller achieve more favorable terms than they would on their own without the representation of an investment banker.
Leading the Transaction – Investment bankers will keep each member of the transaction team in sync and lead the transaction while you lead your business.
A sell-side transaction is an intense and time consuming process. The sell-side process usually lasts nine to twelve months, sometimes longer. When the investment banker is leading the transaction, they control the flow of information so you can continue to lead your business.
One of the worst things that can happen in the sell-side process is when the financial situation of the seller’s business deteriorates. This happens when a seller is over-involved in the day-to-day work of the transaction and becomes more absent in the operations of their company.
If the business does not continue to grow and operate efficiently in line with projections given to the buyer, this may result in a renegotiation of price and terms or the transaction could unwravel and completely derail.
By taking on most of the day-to-day work of the transaction, your investment bankers mitigate business disruption by enabling you to preserve your focus on leading your business and the day-to-day operations of your company.
Your investment bankers understand what your business is worth, and will steer you away from a transaction if the terms are unfair.
Your investment bankers are impartial and well-positioned to make decisions when emotions run high and help you walk away from a transaction when it no longer makes sense.
A good investment banker will work shoulder to shoulder with you until the right transaction is located.
Negotiating the Transaction Terms – Adding experienced negotiators at the negotiating table will help you effectively negotiate a transaction.
Experienced negotiators independently advocating for your interests can help you add favorable terms to the transaction that matter most to you and help you overcome what appear to be insurmountable hurdles.
When the terms of a transaction are mutually beneficial, seasoned negotiators understand when compromises need to be made strategically to keep the transaction moving forward and when a point cannot be compromised.
The negotiating experience of an investment banker can help you understand what items should and should not be placed on the negotiating table and help you walk away from a transaction when the terms are no longer favorable.
Your investment banker won’t negotiate terms independently of you and will involve you, your attorney, and CPA when needed.
Structuring the Transaction – There are countless numbers of ways to structure a transaction, so no two transactions are ever the same.
Structuring the transaction refers to the type, timing, and amount of consideration the seller will receive from the buyer, as well as the legal mechanism of the transaction. The legal mechanism of the transaction will either be an asset sale or a stock sale.
In an asset sale, the buyer is not required to purchase all of the assets from the seller. In an asset sale, the buyer is purchasing specific assets of the company and the agreement is referred to as an asset purchase agreement. Around 75% of M&A transactions are structured as an asset sale.
In a stock sale, the buyer is purchasing the equity of the company and the agreement is referred to as a stock purchase agreement.
IRS guidelines allow the buyer in an asset sale to step-up the depreciable basis of the assets being acquired which provides favorable tax benefits. In an asset sale, the buyer will choose specific assets to purchase and exclude the assets it does not wish to accept. They can also choose the specific liabilities they want to assume and leave behind liabilities they do not wish to accept, and avoid liabilities that are unknown.
Buyers prefer an asset sale over a stock sale, but an asset sale has limitations.
Certain assets are non-transferrable and others are more difficult to transfer to the buyer in an asset sale. For example, contracts will often require the consent of both parties in an asset sale. Issues of assignability also arise with intellectual property, leases, and legal permits. Obtaining consents and refiling permit applications can slow down the transaction process. Non-transferrable assets must stay with the original entity which may require the buyer to purchase the equity of the company to acquire those assets.
Invariably, buyers and sellers disagree over the value of a privately-held business and a seller receiving the entire purchase price at closing is uncommon. The purchase price will consist of a percentage of cash at closing plus a combination of seller financing, earn outs, and consulting agreements.
Investment bankers help bridge the valuation gap and help the seller mitigate risk by reducing the amount and duration of seller financing to receive as much cash at closing as possible.
The goals of the buyer and seller are always different, and potentially conflicting, so it is the investment banker’s responsibility to collaborate with your attorney and CPA to find a structure that is mutually beneficial to you and the buyer.
About Piedmont M&A Advisors
Piedmont M&A Advisors is a boutique investment banking firm specializing in buy-side and sell-side transactions for businesses with revenues between $10 million and $200 million. We also provide capital raising, valuation, and strategic advisory services.
To learn more about Piedmont M&A Advisors, or to discuss questions you might have today about selling your business, contact us today for a free consultation.