Middle Market Investment Bankers and Intermediaries

Understanding What They Do and Picking the
Right One

Baltimore, MD—August 1999 M&A Representation in a Nutshell

Larry, a transaction attorney and a friend with whom I had shared several clients, had just referred me to these telecom clients the previous Thursday. Larry also had made it clear the clients did not want me to sell the business. They just wanted a consult; the clients already had a buyer, after all, and a $9 million offer on the table.

“Dennis, the clients only want you to advise them on the valuation and negotiation process,” Larry explained. “They already have the offer in hand.” As a rule, I always make every effort to discourage clients from dealing with only one buyer. But when clients insist otherwise, as appeared to be the case this August morning, I am willing to proceed, advising them on an hourly-fee basis rather than for my normal contingent fee. And so the Monday morning meeting had been scheduled.

I arrived at the meeting that Monday morning in a warehouse-office industrial park. Larry introduced me to the buyers as the clients’ investment banker. The buyers previously had offered to pay approximately $9 million for the clients’ business, and were there to close the deal at least at the Letter of Intent stage. But within minutes that morning, the buyer raised the offer to $11 million, before I had a chance to do anything more than shake hands and sit down. Had my good looks alone sufficed to account for this 20% increase so quickly? My wife, a better judge of such things, doubts it.

The buyer, a group from Florida chasing the telecom explosion that was just then reaching its peak, immediately had assumed—incorrectly—that the presence of an investment banker reflected the likely interest of other prospective buyers. In an attempt to preempt a competitive auction for the seller’s firm, the buyer immediately raised its offer by more than 20%. This was the buyer’s first mistake, and it richly rewarded the clients; a $2 million windfall gained in mere minutes is not chopped liver!

Yet despite the fact that buyer’s first mistake played out in favor—big time—of the clients, it also exposed a misperception on the part of the clients that otherwise could have proved quite costly. Up until that Monday morning, the clients thought they understood the value of their business in the marketplace. A $9 million offer on the table was more than they thought their business was worth, or they would not have asked me to limit my participation to negotiation formalities to close the $9 million transaction. But in just a few minutes, the buyer opened the clients’ eyes. The clients realized now that, in fact, they had no idea how valuable their firm might be in the marketplace. And maybe the buyer had no idea either, but the buyer’s eagerness to close a deal made one point perfectly clear to the clients: Their firm was possibly worth more than even $11 million.

After the buyers left the meeting, my new clients asked me what I really thought their business was worth. Having completed some preliminary calculations, I suggested that a preliminary valuation of $20 million seemed reasonable. The clients asked what my fees would be and readily agreed that, while the fees were not insignificant, they would be quite reasonable if I could get them another $9 million in value. In the wake of that meeting in August 1999, the clients decided to auction their business.

Eight months later, I assisted the clients in closing the sale of their firm for more than $38 million. In fact, the highest offers on the business exceeded the accepted deal price by at least $6 million more than even that.

Finally, I should add that within less than 90 days of the closing, the business could not have been sold for $5 million, much less $38 million. The telecom market imploded with the power and suddenness of an atom bomb. My client, by the way, is now fat and happy in a well-funded retirement. He plays golf most days now, and I admit that I am little jealous of that. His handicap dropped 15 strokes, too. I guess you can buy a golf swing if you have the time and the money after all.

The Telecom Deal

Our Middle Market telecom deal was illustrative of many aspects of Middle Market deals. It reflected the impact of even apparent auctions on the outcome, as well as the paradoxical need for and at the same time fallacy of preliminary valuations except as points of departure. Did I really screw up suggesting a $20 million preliminary valuation for a company that ultimately sold for $38 million? No. My preliminary valuation was accurate, as far as it went. The closing price reflected the orchestration of an auction among competing buyers.

This anecdote (true) also illustrates a concept we will address later: deal terms trump deal stated or nominal prices every time. The clients, in this case, entertained several offers that, expressed in terms of price alone, substantially exceeded the offer they finally accepted. The clients preferred the terms of the winning buyer to the some of the “nominal prices” offered because, quite frankly, it was worth more money in their pockets at the end of the day and after all that is what counts.

The story also highlights the dramatic impact of timing and business cycles on valuation (see Chapter 6). The clients sold their firm at the peak of the telecom industry bubble and got out just in time. Had they closed the transaction just a few months later, they would have been forced to accept a much lower price (probably not in excess of $5 million).

Using Professional Investment Banking Assistance and In-House Teams

I will address the external teams necessary to get a deal done later, but professional investment bankers will spend a fair amount of attention to organizing a team of in-house professionals that represents the client’s needs and understands its business functions. For example, in my own firm, a typical team consists of at least five professionals, a lead investment banker, a second coinvestment banker, a senior analyst, a junior analyst, and a valuation expert. This is more or less critical to a successful outcome, just as the proper stance and grip are crucial to a great golf shot. Some say that it’s all in the swing. But if your stance and your grip are wrong, your swing will be all wrong, too.

Professional Assistance in M&A Deals

In most cases, the cost of an experienced mergers and acquisitions (M&A) investment banker amounts to little more than a fraction of the economic gain realized by the client. Sorry, I know that sounds self-serving, but I have seen this over and over again. Every month, someone brings a done deal to us or a Letter of Intent on a not-yet-done deal, and it is obvious how much can be or could have been gained in terms of additional dollars to the client if the client had professional advice and representation. The gains are not minor nor difficult to see immediately, most of the time. Unfortunately, most “might-have-been” clients do not have a clue, and as it is often unfortunately after the fact, we usually leave it that way out of politeness. While it is difficult to corroborate statistically, clients who represent themselves in so complex an undertaking most likely will leave exponentially more money on the table than they save on fees paid to a good investment bank. One of my business associates recently conducted an informal study of a large number of Middle Market deals. He compared deals in which sellers were represented by investment bankers to those in which sellers represented themselves. The deals closed by sellers represented by investment bankers closed at prices 10% to 30% higher than those in which sellers represented themselves. The results—even of this informal survey—strongly suggest that paying an investment banker a 3% to 5% fee is a no-brainer.

Middle Market M&A transactions by definition are high-stakes deals with no second chance to make things right if they go wrong. They require expert knowledge in the use of emotion and tone by principal negotiators who are skilled and disciplined in an understanding of limits, custom, usage, and standard M&A conventions. Negotiators must understand the nature of Middle Market M&A negotiations to distinguish between posturing for position and standing one’s ground, between when to push, when to fight, or when to call it a day. Some very fine lines must be navigated here, for sure.

Professional negotiators understand that every deal dies a thousand deaths, but can be actually born (consummated) only once. Sellers who decide to go it alone might well find all of this overwhelming, especially when selling a business for the first time. To be confronted by “the thousand deaths” that such deals die before they close—especially as regards the sellers’ “babies,” businesses they have built from scratch—and to be distracted from actually running those businesses during the final crucial months, during which their operational and financial performances play a major role in their ultimate selling prices is . . . well, not a good idea.

Nor is the value an experienced M&A negotiator brings to the table limited to the art of the auction. The sport of boxing may provide an insightful metaphor as well. When an investment banking professional represents one side of a Middle Market business transaction while a counterparty remains professionally unrepresented, one of two outcomes will transpire. The most likely outcome will be a one-sided battle, as when an amateur steps into the boxing ring to compete with a pro.

Ironically, though, in Middle Market M&A transactions, even the pros prefer not to “box” with amateurs, precisely because the mismatch itself can compound the potential for missteps, blind alleys, and detours that needlessly frustrate the dealmaking process. Another scenario is the unpleasant, unsatisfying spectacle of the professional dealmaker inelegantly pursuing the amateur around the ring without making any real contact in advancing the deal. In such cases, the amateur usually is aware (heaven help his client if he is not) of the mismatch and, in response, endlessly plays defense by running away from all advances. Given this scenario, nothing gets done in the ring or on the deal.

The ideal outcome, a successful deal believed to be fair and equitable to both sides, most likely will result when seller and buyer both bring professional investment banking representation to the table. This is because the pros routinely cut through maybe 90% of the BS that hobbles the dealmaking process and bedevils unrepresented sellers and buyers alike. Think about it: The pros have no reason whatsoever to prolong the sales/auction process. Their intent is to close a deal quickly and efficiently while maximizing their clients’ outcome—and then move on to the next deal.

When pros representing sellers and buyers face off against one another, their respective understandings of each other’s likely strategies and tactics and their common knowledge of M&A conventions allow them to advance their agendas professionally, impersonally, and expeditiously, even as they test each other’s limits and/or general willingness to deal. When sellers and buyers are mismatched, the likelihood of either a slaughter or an undoable transaction increases: No fun in either case.

Preliminary Valuations by Investor Bankers

Excellent technical skills that come from deep formal valuation training and experience are, in my opinion, absolutely required when it comes to ferreting though often contradictory and inconsistent valuation indicators while establishing a preliminary business valuation. A competent investment banker always conducts a preliminary valuation estimate based on what he believes to be the approximate range of values for a company in its industry at any given time. His job is not to underestimate or overestimate that valuation, even though some unscrupulous M&A intermediaries may overestimate valuations just to sign a client. Investment bankers who have seemed to overestimate valuations to this end have faced a number of class action lawsuits in recent years. Other investment bankers may underestimate their valuations to lower client expectations, thus making their jobs easier later on. No honest, professional investment banker would endeavor to over- or underestimate a prospective client company’s valuation. Prospective sellers can protect themselves from less scrupulous investment bankers by checking the references of any they would consider hiring.

The differences between a preliminary valuation provided by an experienced investment banker and the final purchase price achieved for his sales-side client are usually more correctly attributed to a successful negotiated auction rather than a bad initial valuation. The negotiated auction itself is the best and final arbiter of the value of a Middle Market company at any given point in time, because it reflects what buyers actually did pay for a company in competition with other buyers.

Expertise and Investment Bankers

“The lawyer who represents himself has a fool for a client.” This famous quote also applies, without question, to sellers of Middle Market businesses. Sales-side (and buy-side as well) M&A is a technically complicated process requiring knowledge of business valuation, taxation, contract law, negotiation, business finance, securities laws, M&A financial conventions, and the M&A process itself.

And never forget the all-important emotional objectivity. Herb Cohen, the author of Negotiate This, may have put it best when he wrote that the best negotiators convey a strong sense of “I care—but not t-h-a-t much,” to the other side. This attitude allows them to keep things on a professional and impersonal keel while maintaining steady progress. They allow the most effective negotiators to press on at just the right time and with precisely the right tone—a major distinction between inexperienced and experienced deal makers.

Investment Bankers as Process Expediters

I heard this story from one of the principals, and I do not doubt its truth. The CEO of a local $20-million Middle Market company was chatting with an acquaintance, the chairman of another Middle Market firm of similar size in a complementary industry.

“It would be great if we could merge our two companies,” they mused, enumerating all sorts of synergistic benefits to each other in the glow of the first date. But even in the lust of first encounter, they were somewhat cautious. It is a lot like meeting a girl (or guy) that you want to impress but are little bit uncomfortable at the same time for fear of offending in some unintended manner so you become perhaps a tad too careful.

And so the dance began. The CEO and the chairman scheduled a lunch, continued to discuss synergies, expounded on mutual benefits. Everyone started getting even more excited. There is one problem, though: Nobody wanted to mention the big question (in the business case, price), even though both sides knew that price eventually must be addressed.

Fast-forward through three months of lunches: (This is getting expensive.) Someone finally mentioned price, at which point the CEO and the chairman realized that their respective valuations of each other’s business were too far apart to proceed. Unfortunately, their refusal to address this critical factor at the start of their fruitless three-month courtship might have saved them both considerable distraction and wasted time. The CEO’s and the chairman’s mutual reluctance to name a price early on obviously reflected their uncertainty as to their respective corporate valuations. It also very likely reflected the difficulty of discussing so “personal” an issue involving firms they had founded and led. The CEO and the chairman simply could not bring themselves to address this critical factor dispassionately and candidly, and most especially early on.

DEALING WITH PRICING COMPATIBILITY EARLY Had they engaged professional investment bankers from the start, the pricing issue could have been dispensed with in the early goings. Investment bankers could have provided a comfortable (let’s call it a chaperoned) environment that would have allowed them to explore the divergence in their valuations up front. A good investment banker would have accelerated this outcome precisely because he is paid to succeed and would not be willing to waste three months of his own time, let alone that of his clients. Bankers are paid to expedite the process, to separate the wheat from the chaff, so that sellers and buyers alike may keep their options open.

Investment Bankers as Management Time Savers

Investment bankers will spend from 700 to 800 hours from start to closing on a typical M&A deal—a prodigious amount of time, indeed. These hours are divvied up among the internal team referred to early in this chapter, including analysts, valuation personal, junior and senior bankers, researchers, etc. Very few sellers are equipped to dedicate 700 to 800 hours to the sales process while continuing to run their businesses. Sellers typically spend 150 to 200 hours of their own time in the sales of their companies via management presentations; preparing and supplying data to be incorporated in offering memoranda and due diligence materials; and other related activities. Burdening management with another 700 to 800 hours (and it would actually likely be much more time due to their inexperience) of deal-related activities would be foolhardy in the extreme. Sellers simply are not in a position to take this kind of time away from their own businesses. I have never, ever, met a seller who represented himself who said he would do so again on his own. Do-it-yourself sellers tend to live and learn.

Investment Bankers as Sin Eaters and Emotional Firewalls

Many Middle Market transactions are far from over even when they have closed. That is because most business sales agreements allow or require the sellers to receive additional payments—earnouts and the like—if their firms meet or exceed postclosing financial and other performance targets agreed to at the time of the sale. Such agreements also may include continuing employment of the seller(s), either full-time, part-time, or as consultants or employees. The success of such postclosing relationships depends in good part on the goodwill of all parties, particularly in the face of at least some degree of the inevitable buyer’s remorse.

Here again, transactions that are intermediated dispassionately and professionally by investment bankers are most likely to allow sellers and buyers to reasonably sustain mutual goodwill, because professional intermediation minimizes the inclination of either side to blame the other personally for the transaction’s business outcome.

This applies to more than posttransaction earnouts and the like, as well. In M&A transactions that involve millions of dollars, it is not unlikely that some and perhaps a lot of emotion will be experienced by the involved parties during negotiations. It is crucially important that there be an intermediary to absorb this emotional outpouring, as there is no more certain deal killer then letting the expression of anger enter into exchanges between the buyer and seller. Frankly, it very often destroys the necessary trust required to get a deal done. At various stages throughout the lifecycle of a given transaction, the Middle Market investment banker may find him or herself very much akin to an old west stagecoach driver, with bullets whizzing by from behind and arrows flying fast and furious at him from the front. That’s not the fun part, but for the good of the transaction going forward, it often is “safer” for seller(s) and buyer(s) to shoot at their messengers than to fire on each other. Experienced investment bankers understand this and will manage the process well. They are paid to do the work, and they are paid to suffer the slings and arrows.

Choosing the Right Investment Bank

Very few investment bankers become sufficiently seasoned and experienced to lead the sale of a Middle Market business in fewer than five years’ intensive on-the-job training (OJT) deal experience, including substantial supervision and mentoring by their more senior colleagues. And even at that, it is unusual if any one individual investment banker—no matter how deep and broad his or her experience—can bring to the table all of the skills, both science and art, that are required. As a result, an investment banker must be capable of mobilizing a team of professional colleagues who together deliver all of the requisite skills. The seller must choose an investment banker with the ability to put together an internal team (much less the external team that I will discuss in Chapter 10) to optimize the seller’s outcome. In this respect, size often matters: as a rule of thumb, investment banks with three or fewer bankers are unlikely to be able to mobilize a team and support a staff sufficient to ensure the engagement benefits from all the representational firepower it will require in the coming six to twelve months through closing. Veteran bankers who operate on their own or with very small firms may constitute the rare exception to this observation, but even so, the seller must consider quite seriously the limitations implicit in their reliance on a solo or small practitioner: Can he bring all the required resources to bear on the assignment? Is his perspective or bandwidth broad enough? What happens if he gets “hit by a bus,” or becomes distracted by other deals? On the other hand, an M&A investment bank should be small enough to ensure that every deal is represented or at least supervised by a very senior investment banker in the lead role.

Park City, UT—February 2001

I was sitting in the family room of a 12,000-square-foot second home perched atop the highest mountain in the vicinity. My host and hostess—he in his 70s, she in her 50s—could open a door and ski right down the mountain from their castle in the sky. They invited me to join them here for a couple of days to discuss their plans to sell their main business. “Chemistry,” apparently, is quite important to them, and I was invited to join them primarily, I think, to test that factor before they hired me to represent them in the sale of their company.

Jim and Margot, relying only on one another, built a $25 million business from scratch, and weathered serious trials and tribulations of entrepreneurship along the way up mountains both figurative and literal. Often, they found themselves within two days of missing a payroll. They staved off bankruptcy through sheer wit, guts, and extreme carefulness, but now they had finally built a winner.

They gave me the impression that they understood better than anyone that, in Middle Market businesses, anything could go wrong, and at any time, unless they held each other accountable and took every matter into their own hands. Not a bad philosophy, and most certainly one that had served them well.

A few days into my visit, Jim looked me straight in the eye and asked, “Dennis, do you have any experience doing sales-side investment banking for a company in our very specific niche industry?” While that very question was by no means unexpected, its timing nonetheless took me aback. Out of the corner of my eye, I saw Margot, watching me like a hawk, carefully studying my reaction while waiting for my response.

The time had come for the rubber to meet the road, or the skis to hit the slopes. Knowing it was coming eventually, on my flight out to Utah, I had pondered several alternative responses. There were so many ways to answer, yet each potential response seemed out of context, inadequate. The problem with context—and any conditionals I might apply in my answer—was the high risk that Jim and Margot dismiss it all as “hedging,” as positioning myself to win the engagement. And from all I could tell, Jim and Margot had never “hedged” anything while building their business, and their innate BS-meters were attuned to trigger sirens should conversational hogwash exceed a few nanoparts per billion.

All of which left me with but one course of action: I had to tell Jim and Margot the unvarnished truth as I saw it, regardless of the consequences. In fact, the unvarnished truth pretty much always is the best of all possible alternatives, even when it costs you a deal from time to time.

“Jim, the answer to your question is no . . . and yes,” I equivocated. (Truth even unvarnished is not necessarily straight lined). Margot seemed confused, if only for a moment.

“No, I never represented a business in your particular industry niche. But, at the same time, yes, I have indeed sold several companies in industries similar to and related to your own niche industry. Frankly, I believe that my experience with those sales-side clients is directly relevant to this assignment, were the two of you to hire me to undertake it.” That answer reflected both my own commitment to never misstate my past experience on the one hand and my gut sense that I could deliver all that Jim and Margot would require in this transaction ... and more.

Jim, Margot, and I discussed this further over the next day or two, but eventually they hired another niche banker (a sole practitioner) who, from what I understand, proved still unable to sell their business (a good one) three years later. I never regretted my answer or even the business outcome. No one wins ’em all.

Jim and Margot were highly successful entrepreneurs, great people, and fine hosts. In retrospect though, I remain no less certain that I could have easily closed a sale of their business that would have served their interests very well.

Specialists versus Generalist Bankers

Because almost any experienced Middle Market investment banker will have closed deals across a large number of industries, industry-specific experience can be highly overrated. Even so, one can always run the risk of underrating industry-specific experience, as well. Let me try to explain this paradox.

If a Middle Market investment bank has reason to believe it lacks the requisite industry knowledge to outmatch either an industry specialist or another generalist firm, it should say so up front and decline the assignment for two reasons: 1) to maintain its reputation for professional integrity and 2) because its shortcomings are likely to result in a deal closed poorly or never closed at all. A bad deal invariably costs the investment bank responsible and, even more importantly, its client.

Investment banks of any decent size will have access to broad, deep, and expensive proprietary and nonproprietary databases and research engines; analysts skilled at obtaining relevant industry information; and the ability to transform industry-related information into marketable business intelligence to advance the sale of the company quickly and efficiently. In certain particularly complex and usually esoteric industries, however, a banker’s comprehensive knowledge of “all the moving parts” and, better yet, a wealth of close relationships with major players having decision-making authority at senior levels may prove advantageous in competition with a full-service Middle Market investment bank.

Yet therein lies the rub. By definition, such a banker’s limited focus could prove useful to closing a deal but must be weighed against the lack of dealmaking facileness that only broad deal-making experience over a large number of industries may bring. I know some fairly successful self-styled investment bankers who transitioned into investment banking after establishing their reputations as business executives in a particular industry who subsequently closed on the acquisition or divestiture of one or more deals on behalf of their former corporate employers. Such M&A intermediaries often bring great interpersonal and social skills to the table as well. Unfortunately, this broad experience invariably leaves them lacking when it comes to the necessary training and broad experience in both the art and the science of sales-side investment banking. At least some of these guys would have trouble calculating compound interest. And, as to critical negotiations, they often prefer to introduce the parties, provide some basic background data and withdraw from the scene, leaving the principals to fend for themselves and have at it. More than a few so-called industry specialists with only minimal deal-making experience never get a deal done. They usually last a few years in the profession before moving on to something else.

How do I know this? My own firm has employed industry specialty investment bankers from time to time over the years, and an enormous amount of my or other senior bankers’ personal time over the course of their first three or four years was required before these industry experts finally became deal makers. But when industry experts (in a very few truly esoteric industries, and there are some) succeed in becoming expert deal makers, it can be the best of both worlds for their clients. Probably 95% of M&A investment bankers are not industry-specific in their focus, as this would limit their opportunities severely. Specialists in the most esoteric industries would account for the remaining 5%, but even then, as I said, most investment banking generalists worth their salt can master industry-specific knowledge very quickly in the information age.

The misconception that industry-specific experience trumps deep general deal-making experience in most cases has led many clients to choose the wrong investment banker, especially when that “specialty banker” is a sole practitioner or a member of a small consulting practice without real M&A experience outside of the client’s own industry.

Finally, even in the cases of larger firms, another issue to consider in dealing with specialists is that after a number of years of this type of narrow industry focus, assuming they are successful, a certain coziness can develop between them and the key industry buyers, not unlike that between lobbyists and politicians. They each rely on the other, possibly, in some cases, to the detriment of the client and/or objectivity. I am not saying for a moment that this always exists, but in some cases, it seems to, especially in an industry with a very limited number of key buyers. Choosing the wrong kind of banker based on a misplaced emphasis on narrow-niche expertise can prove very expensive in terms of lost deal value.

Investment Bankers as Matchmakers

A widespread misconception among sales-side clients is that Middle Market investment bankers are mainly responsible for providing matchmaker or “dating” services on behalf of sellers. Identifying and introducing prospective buyers arguably is among the least difficult and possibly (albeit counterintuitively) least important of the services provided to sellers by Middle Market bankers. This is another reason that the “specialty bias” is largely a myth.

In the vast majority of transactions in which I have been involved, the ultimate buyer has been identified within the first four weeks of the engagement. With Middle Market engagements for even excellent companies averaging six to twelve months in duration, or 180 to 360 days, the four-week buyer identification phase accounts for approximately 15% or less of the engagement cycle and, arguably, its overall importance in selling a Middle Market firm. The other 85%, essentially, is about execution, structure, negotiation, etc.

Middle Market investment bankers most certainly do occasionally play substantial matchmaking roles—and quite effectively, especially in banker-initiated engagements where the banker senses the potential for a “deal made in heaven” that the prospective seller and buyer have yet to recognize. (See Chapter 30, The Business of Middle Market Investment Banking for Consultants or Others Who Might Like to Do This Kind of Work—“The New York Style of Banking”).

In summary, Middle Market investment bankers do locate potential buyers after being engaged to transact a sale, even though this aspect of their work usually remains among the least challenging and lowest value-added of the services they provide.

Securities Laws and Investment Bankers

Wall Street’s Upper Market M&A deals are all but exclusively handled by broker/dealers and securities representatives licensed through the National Association of Securities Dealers (NASD) (and through its successor, the Financial Industry Regulatory Authority, or FINRA, as of 2008). This is not always the case in Middle Market M&A, although Middle Market investment bankers in increasing numbers are seeking to become licensed with FINRA broker/dealers as securities representatives. Prospective clients are well-advised to seek representation only from FINRA-licensed investment banking professionals and firms.

Since 1986, changes in the U.S. Internal Revenue Code necessitate the strategy that the sale of most Middle Market businesses occur through the buyer’s acquisition of the seller’s stock in the corporation being sold (to avoid severe double taxation). Owners usually risk disastrous taxation results should they fail to sell their firms as stock deals.¹ Engaging a FINRA-LICENSED investment banker to conduct the sale of a Middle Market firm via the purchase of the firm’s securities minimizes the risk of violating federal and state securities laws that, if violated, might result in the rescission of the sale by the buyer, among other highly undesirable legal consequences.

Investment Bankers and Formal Valuation Experts

Independent, credentialed valuation experts rarely are required (or capable, unless they are also deal-experienced investment bankers) to represent sellers of Middle Market businesses; but on the other hand sellers’ investment bankers should be quite capable of providing all necessary expert valuation services as part of their overall professional representation. As a rule, then, the investment bank should also provide formal valuation services to a large number of business not necessarily in M&A transactions, as that will ensure that there are adequate numbers of highly trained in-house staff to provide the type of preliminary valuation needed in the initial stage of an M&A deal. A Middle Market investment bank’s admission that it cannot provide such expertise and/or services should constitute at least a significant red flag arguing against its proposal or pitch to a prospective sales-side client.

Prospective buyers—whether larger companies or sophisticated private equity groups—undoubtedly will bring a trained valuator to the table. Sellers are obviously well-advised to match, as best they can, the skills prospective buyers mobilize. A Middle Market investment bank that lacks embedded formal valuation knowledge is disadvantaged by prospective buyers that employ expert valuators, and that in turn disadvantages the seller. Investment bankers who rely solely on their command of the “art of the deal,” at the expense of any particular focus on its scientific underpinnings (including valuation science)—bringing no more than a rudimentary grasp of multiples, rules of thumb, etc., to the table—are very likely to miss or to misstate financial values, especially when representing unusual sellers or transactions seeking capital for clients. There can be no substitute for formal financial and valuation skills at least somewhere in the bank’s professional staff when it comes to establishing the value of product line sales, startup companies, balance sheets, working capital deliverables, and tax structure, among many, many other special situations.

Chapter Highlights

• Auctions real or perceived, represented by qualified M&A Investment banker, typically greatly increase the value to a client (as opposed to working with a single buyer).

• Most qualified investment banks will assemble a team of five or more professionals for each engagement.

• Nominal or stated deal prices are always trumped by deal terms and structure and what that brings to the bottom line for a client.

• Client self-representation is virtually always a very costly mistake in terms of the bottomline the real consideration received by them.

• M&A investment bankers, beyond deep expertise, provide technical client assistance in several areas:

• Preliminary valuations

• Conducting of well-managed auctions

• Contract law

• Negotiation

• Business finance

• Securities regulation compliance

• M&A financial conventions and process

• Investment bankers function in addition to the above by:

• Expediting the deal process

• Saving substantial amounts of management time

• Acting as sin eaters and emotional firewalls to protect the deal

• Qualified investment banks should be large enough to offer the various technical services that are not usually embedded in only one or two people while at the same time small enough to be able to provide senior deal makers for each deal.

• Most, but by no means all, Middle Market transactions do not require specialty investment bankers or industry specialists.

• Matchmaking is widely perceived to be the most important task of an investment banker, but this is actually a myth.

• Formal valuation expertise is not sufficient to provide M&A representation, but nevertheless it is a critical skill in the best investment banks.

Note

1 An exception to this would be the sale of an S-corporation’s assets. See Chapter 29 regarding taxation.