Chapter 16Should You Hire a Banker?

Frankly, bankers are only helpful when you have a great company in a hot space where multiple buyers have lined up with strong acquisition offers. In such a scenario, a seasoned banker can help you discover your true market value and handle all the intricacies of negotiations without damaging your relationship with the acquirer. Very often, you know you are in this situation when an interested buyer reaches out to you through multiple channels and presents you with a verbal offer unsolicited. And if you respond that you have a fiduciary duty and would need to run a process and this does not deter the interested company, then this is the perfect time to hire a banker.

Ask your board members for recommendations for bankers they have worked with in the past. In the banking business, it’s all about referrals and past clients. Talk to a few bankers and get a feel for the rapport and how well you work together. The first and most important questions you need to figure out is who you will be working with exactly and does this person have the necessary network where she can create a bidding environment. The premium that you pay for bankers is their network to discover the true market value of your company. If you only have one potential offer, then that becomes the market price. You might be tempted to work with a big firm whose named partners have indeed made headlines. Be warned, unless you have a sought-after company with a high price tag, the person working with you might be a fresh out of school MBA who is inexperienced and not well connected. Not to say that you wouldn’t get a great outcome from this relationship, you might not get the level of experience and expertise you expected when the named principals sold you on why you should pick their firm. Secondly, would they still stick around when things get tough and the market turns? Ask about a company that they couldn’t sell, and try to understand how persistent and creative they are when it comes to working with buyers. Bankers have a tendency to boast their biggest deals, which is equivalent to a lottery winner telling you their lottery number. This is not helpful as every deal is different and the M&A market changes on a whim. There is also a survivorship bias as some bankers only take on clients that they know they can make money from, so it’s important to vet for the cases where the deals fell apart and what they learned from them. As much as bankers hate to admit, these happen more often than what is talked about. There are also cases where the bankers give up after a few rounds of outreach or negotiations after realizing that selling a particular client’s company is not an easy lay-up. Sometimes this is not their fault simply because the market is not there, but there is clear evidence that they knocked on every door possible. Finally, can they articulate the mission of your company and understand the intricacies of your business? Ask about the most difficult clients they worked with in the past, what made that experience difficult, and check for references.

Bankers are expensive, and if you have a successful exit, they will make the most money out of everybody on the cap table based on the individual return on investments. Typically, they charge a percentage of the final sale consideration plus the retention package given to the team. Even if you sell to a private company and get paid in private stocks, they would value the private stocks as cash and be paid in cash. And this percentage floats anywhere between three to five percent. Top bankers charge on the higher end whereas up-and-coming or boutique bankers may charge a bit lower. You can typically negotiate these rates, but don’t expect to get it any lower than three percent. Finally, some bankers also charge a retainer fee that could either be one-time or paid monthly. This is to protect them from risk exposure of discovering that a market is not there and cover their opportunity cost from working with other clients. The one-time retainer fees range anywhere between tens of thousands of dollars to hundreds of thousands dollars. The retainer fee could be credited in the final payout when the deal closes. The monthly retainer model is usually applied when the market is weak and the banker needs to do a lot of discovery work to find suitable buyers. In such a case, the bankers almost serve as an outbound Biz Dev who works on creating partnership opportunities and building relationships. Bankers typically never take on stocks and they will get paid first just like lawyers when a deal closes. Send the contract you have with the bankers for lawyers to review before you sign them. Figure out precisely if there are any clauses around termination or tail period. There are instances where bankers do not pull their weight and you need to fire them down the road, so it’s best to make sure those situations are addressed in the contract so it does not lead to litigation down the road.

Now should you hire a banker when there is no actionable inbound interest and you have no prior relationships? I would recommend no, as in such a case bankers would typically rely on their network of Corp Devs and present your company to a laundry list of potential companies that likely have nothing to do with your space or business or you have no interest working for. It’s not to say that you won’t get lucky, but the probability of those conversations leading to a M&A is close to zero. It is best that your money is spent on building products or developing relationships by yourself. In any M&A scenario, the acquiring company would rather speak to you as the founder as opposed to a banker. They want to build rapport and understand if they can trust you and work with you from firsthand interactions. Looping in bankers too early could send the wrong signal and jeopardize your chances. Just remember that there’s nothing that your banker does that you wouldn’t be able to do. They can only help you move the deal along when there is a deal to be had. They cannot create a deal out of thin air. A deal that you are willing to take needs to come from an inbound interest.