A large swath of the business law profession is focused on helping business owners to mitigate risk and maximize the value of their enterprises. For all of the attention that high-profile litigation gets, far more attorneys serve as advisors to middle-market businesses than handle large corporate lawsuits. With that in mind, it is important for attorneys to understand the endgame for business owners – and that endgame for successful companies is usually a sale of their business. Retiring business owners need an exit strategy, and selling their firms provides a way to monetize the most valuable asset that most business owners possess. Yet selling a business is rarely easy, and doing so generally requires help not only from an attorney but from other professionals as well.
Middle-market business owners looking to sell their companies traditionally have two options: try to sell the company themselves, or hire a professional (e.g., an investment banker). Like all professionals, though, investment bankers don’t come cheap. So this naturally leads to the question: do business owners get value by hiring investment bankers, or are they better off going it alone?
That question is at the heart of a new research study I recently authored. Part of the role of financial economists is to do empirical data-based research around important questions that impact the financial markets. Middle-market companies make up a vast swath of commerce across the country, and as a result, it’s critical to understand these firms well. Yet there is little data on operations for these firms, and even less data around buy and sell transactions that occur.
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To examine whether investment bankers add value for clients, I conducted a survey of numerous business owners who had sold middle-market companies in the last five years, including questions about their experience during the sale process and the role that investment bankers played. My recent study is the first empirical evidence of the value that professionals like investment bankers (and by extension attorneys and accountants) play in selling a firm. Prior to this study, most middle-market investment bankers had been resigned to using anecdotes rather than hard data to demonstrate their value.
The survey examined eight areas where investment banking services might add value. The first is preparing the company for sale, which includes identification of value drivers and addressing weaknesses. The second is managing the M&A process and strategy, which involves the creation of a market plan to conduct an auction and the execution of that plan. Next is identifying and finding the buyer followed by adding credibility to the seller, ensuring that buyers are aware this is competitive and information is accurate. Coaching the owners and assisting management focus on running the company during the sale process represent another value of using an investment bank. Investment bankers then manage the transaction, and finally they structure the transaction.
Survey results were based on a scale of 1-5 (5 being the most important) for each of these eight categories. The fact that investment bankers could “identify and find a buyer” was ranked as the lowest importance rating, suggesting that bankers are doing much more than simply finding a buyer for the company. “Managing the M&A process and strategy” ranked highest, with a ranking of 4.38. “Structuring the transaction” was ranked a 4.2, and “educating and coaching owner” was ranking 4.16. Former business owners whose companies received fewer buyout offers put a greater focus on the importance of finding a buyer due to the owners wanting to run an auction, and being a smaller company.
Open comments at the end of the survey included responses like, “Unless you have substantial expertise, a broad buyer network, and a lot of free time, partner with an investment bank. You *may* be able to get it done yourself, but you’ll be leaving millions of dollars on the table as well as closing a higher risk transaction (when it comes to representations, warranties, and indemnifications).” – Respondent A. Also, Respondent D claimed, “Representation definitely got us a better price and more favorable terms.”
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The study concluded that all eight services by investment bankers previously listed added value, but some services provided by bankers were more valuable than others. The survey also found that the middle-market M&A transactions that used an investment banker seemed to have a final sale price equal to or higher than the initial sale price estimated.
Overall the study offers the first set of empirical evidence suggesting that business owners are getting value for their money when they hire investment bankers to sell their firms, and what the source of that value is. The evidence presented in the study will not convince everyone to use an investment banker, of course, but it does offer the first set of hard, unbiased data to support the view that business owners are making an investment by bringing in professionals to manage a middle-market company sale.
Michael McDonald is an assistant professor of finance at Fairfield University in Connecticut. He holds a PhD in finance. Michael consults extensively with organizations ranging from Fortune 500 companies to start-up businesses on financial matters through Morning Investments Consulting. Michael has served as an expert witness in legal disputes, and is an arbitrator with the Financial Industry National Regulatory Authority (FINRA). Michael can be reached at [email protected].