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How to Select an Investment Banker? (Series 1 of 3)

Updated: Sep 27, 2019

As an investment banker for a boutique firm providing merger and acquisition services and corporate finance advisory services, we are often asked to "pitch" our services to prospective clients as they try to figure out who to hire.

For a business owner contemplating hiring an investment banker, selecting the most appropriate one for your situation and who will provide high quality advice are key. It could mean the difference between a failed versus successful deal, or at a minimum, a poorly executed deal with a low valuation, troublesome terms or high cost of capital versus a well executed transaction.

A troubling issue is that most business owners do not maintain ongoing relationships with investment bankers and will only work with that person once - on that owner's deal. Since it is such an important decision as a lot is riding on the transaction, how does a business owner select the right investment banker to represent his interests?

Here are a few questions a business owner should consider:

Do they have the right experience to execute my transaction?

Experience spans multiple spectrums; here are a few ways to think about a banker's capabilities.

"Bulge Bracket" vs. Middle Market vs. Business Broker

Bulge Bracket generally refers to the large investment banks characterized by those headquartered near Wall Street offering the full range of investment banking, sales and trading of securities, research, lending, market making and large distribution networks often with a global footprint. investment bankers are recruited from the top schools, receive formalized training, are put through a rigorous apprentice program and gain a lot of experience.

Business Brokers generally represent sellers of "main street" businesses. These could range from a small, local business, such as a restaurant, to a business with $1-$2 million of revenue.

Middle-market investment banks fill the area in between. Generally, companies with $5 million or more of revenue are too large and the deals are too complicated for a business broker to handle. Due to the minimum fees charged by Bulge Bracket firms, companies with less than $150-$200 million of revenue do not capture their attention. Some middle-market investment bankers began their careers at the Bulge Bracket firms, ultimately electing to focus their high level of experience on middle market companies.

Industry Specialization vs. Generalist.

Does they focus on the industry in which my company competes or is he a generalist with a smattering of experience across a broad range of industries? Ultimately, can they banker understand my company, its competitive advantages within the context of its industry and communicate a compelling story to investors or buyers? Bulge Bracket investment banks tend to have industry specialist groups. Business brokers are typically generalists. A middle-market investment bank could be either a generalist or a boutique having a specific industry focus or some hybrid of both.

Track Record

Demonstrating a track-record of successfully closed transactions similar to the one being contemplated is where the rubber meets the road.

Approach Toward the Transaction Process

Does they customize each transaction process to the client's situation or does he use a one-size-fits-all, taking the same approach for every deal?

Personal Network and Relationships

In order to be effective, the investment banker must have a large Rolodex of genuine relationships with investor groups and buyers of deals. Since investing or buying companies is risky, personal relationships built on trust is a cornerstone of the deal business. Building relationships takes time and is usually the result of representing many transactions to these groups to understand their deal appetite as well as get to know the people personally. Just offering a database download or a list without the relationship component is ineffective.

Will they devote their full attention to my deal?

You need to ensure that the investment banker has the capacity to handle your deal. If he is managing too many transactions requiring significant amounts of time, he can become distracted and hard to reach. Also, the deal should fit from both a size and type perspective with what the investment banker normally pursues. From a size perspective, is the deal on the smaller or larger end of the spectrum for this investment banker? Larger deals tend to receive more attention.

Do I believe this banker will provide honest, candid advice?

Other than what you perceive in personal conversations with the banker, one of the easiest ways to research this is to contact references. Past clients and other professional advisors who have worked with this investment banker, such as attorneys and accountants, can provide important feedback.

Do I like working with this person?

A transaction process is intense, interspersed with anxious moments, and requires a lot of time and back-and-forth communication. Having a good relationship is important as you will be working side-by-side with your investment banker.

How are the fees structured and are they reasonable?

We have written about investment banking fees in a separate blog called "Aligning investment Banking Fees with Client Interests", but here is a quick summary. Generally, a credible investment banker will charge a non-refundable retainer upon engagement. This retainer may be a lump sum, paid over time or paid based on achievement of certain activities associated with the transaction process. This retainer should represent a minor portion of the overall fee.

The majority of the investment banker's fee, is tied to successful completion of a transaction. The success fee is structured as a percentage of the deal size. Although many business brokers refer to the Lehman formula, few investment bankers use this structure. Instead, they may quote a straight fee percentage (based the amount and type of capital raised or the overall size of a M&A transaction) or a performance oriented fee percentage that increases or "ratchets up" based on hitting certain transaction value hurdles.

Choosing the right investment banker is important. You need to ensure that he can represent your interests well and can act as your advocate in a transaction. Make sure to do your homework.

Over his 15 year career as an investment banker, Mr. Wilcox has assisted owners of mid-sized private firms and executives and directors of public companies in marketing, structuring and executing a number of complex transactions.

Transaction experience includes company sales, mergers, acquisitions, recapitalizations, private placements, debt financings and public offerings. Mr. Wilcox has concentrated his transaction experience in the Energy, Industrials and Infrastructure sectors.

Prior to forming The Wilcox Group, his career includes experience with major Wall Street and middle market investment banks: Bear, Stearns & Co. Inc., Raymond James & Associates, Inc. and Growth Capital Partners, L.P. Mr. Wilcox is a licensed Registered Representative and an investment Banking Representative.

Follow Up readings: Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions

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