Middle-market business owners looking to sell their companies traditionally have two options: try to sell the company themselves or hire a professional (i.e., a middle market investment banker). Like all professionals, investment bankers don’t come cheap though. So 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 authored as a financial economist at Fairfield University. I became interested in this question after talking with bankers at a boutique investment bank, Carter Morse and Mathias, which focuses exclusively on the middle market. The firm helps business owners in that segment sell their firms.
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.
To examine whether investment bankers add value for clients, I conducted an in-depth survey of 85 business owners who had sold middle market companies in the last five years for amounts ranging from $10 million to $250 million. This process included asking questions about their experience during the sale process and the role that investment bankers played. Sixty-two percent of the firms ran an auction for their business.
Managing the complex M&A process and strategy was valued the most by owners. (See chart below.) By maintaining a competitive process with multiple bidders, investment bankers can maximize shareholder value through a disciplined process. Without a disciplined, competitive process, sellers may question if the best possible offer was obtained.
Negotiating and structuring the transaction were also ranked highly on the list of valued services. By allowing the investment banker to lead the negotiations, sellers can maintain a positive working relationship with the new owner. If sellers take on these difficult negotiations themselves, the relationship between buyer and seller can often start off on the wrong foot. Investment bankers can insulate sellers from these difficult negotiations to help obtain the best possible outcome that meets their client’s transaction objectives.
Similarly, the creativity and experience of investment bankers in structuring a transaction can drive incremental value and achieve all of the various objectives of both buyer and seller. With good structure, buyers can limit their potential risks while sellers can often get preferential tax treatment or gain significant upside beyond the consideration paid at closing. Negotiating and structuring a transaction solution that balances the objectives of both buyer and seller can also increase the probability of a successful close.
One of the first questions that most business owners ask in their interviews of potential investment bankers is “Can you find me a buyer?” or “How many deals have you done in XYZ industry?” Surprisingly, despite its perceived importance by many sellers at the outset, “identifying or finding the buyer” was ultimately valued the least by successful sellers. Investment bankers can tap into not only their professional contacts and networks but also a wide variety of industry research, sophisticated investor databases, and internet searches to identify additional potential buyers. However, the marginal value of identifying a potential buyer often pales in comparison to the other services investment bankers provide.
The study also illustrated that middle market M&A transactions that used an investment banker appeared to have a final sale price equal to or higher than the initial sale price estimated. According to the business owners surveyed, investment bankers add moderate or significant value by “leveling the playing field” between professional buyers and their advisers and the first-time seller.
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. Not all business owners should use an investment banker, but most seem to benefit. As one former business owner put it, “You should use an investment banker unless you have substantial experience bringing companies to market for sale previously.”
Michael B. McDonald is a professor of finance at Fairfield University.