Investment banking can be an elusive concept for entrepreneurs.
Although it's often confused with venture capitalism, investment banking is a form of equity transfer that exists in a class by itself. And if you're entertaining the idea of selling your business, a good investment banker could be your most valuable selling asset.
Investment bankers specialize in helping private companies raise money through the sale of securities. So instead of selling your business outright, you can sell your ownership stake in the business through legally issued securities. Most small businesses lack the value that's necessary to attract capable investment bankers. But for medium sized and large businesses ($5 million or more), investment banking can be a profitable way to orchestrate your exit.
The outcome of the relationship with your investment banker is depends on the quality of the investment banker you choose. Like all businesses, investment banks are profit-driven. That means they tend to invest more time and energy in clients who yield the highest profits. As the seller, your decision needs to be driven by more than just cost. Here are some of the factors you'll need to consider when choosing an investment banker for your business sale.
- Goals & objectives. Your investment banker needs to be onboard with your specific goals and objective from the outset of the process. For example, if your primary goal is a fast turnaround on the sale of the business, the investment banker needs to be prepared to make that their primary goal, too, rather than waiting for better market conditions.
- Experience. Investment bankers work for a wide range of clients. Ideally, you should focus your search on investment banks with a proven track record of success for similarly sized companies in your industry. If your company is situated in a unique industry or market niche, at least make sure the investment banker has a history with private companies in your value range.
- Personal attentiveness. When hiring an investment banker, your goal should be to secure the personal attention of the investment bank's most senior staff members. Unfortunately, you probably won't merit their personal attention. At the best firms, companies worth less than $30 million are usually assigned to junior staff members. You might be able to get senior level attention at a smaller investment bank, but the trade-off could be fewer overall resources and a lower sale value.
- Discretion. Make every effort to evaluate the reputation of potential investment bankers before you sign an agreement. The investment banking process involves a long process of due diligence and frequently culminates in a "no deal" outcome. If information leaks out during the process, it could damage the value of the business when you attempt to sell it through a broker.