Should You Engage an Investment Banker or Work Directly With Investors?
That depends on your goals.
By Michael Lonergan, Founder and Managing Partner, Georgia Oak Partners
I’ll never forget the stack of letters and printed-out emails Paul Hoppes showed me in our first meeting together in Cairo, Georgia. As the founder of a successful manufacturing business in operation for more than 30 years, he had received countless unsolicited inquiries from investment bankers, private equity firms, and other investors over the years. In our meeting, he explained how some PE firms even submitted Letters of Intent to purchase his company without so much as speaking to him on the phone. In fact, he shared that we were the first potential investors to even to offer to come to Cairo for an initial meeting. While this was an easy drive for us, I understand not all firms have the same approach to getting to know the founders of businesses before offering to buy or invest in them. This is one of the reasons I founded Georgia Oak.
I knew from experiences early in my career that most investment banking and private equity firms employed arm’s length tactics of generating deal flow. While many firms are focused on “the next deal,” it was clear to me from day one that business owners are focused only on their deal and their company. This misalignment can create significant issues for business owners.
Over the years, our team has talked with hundreds of founders and owners who have been through all kinds of sale and capital raise events. There are essentially two paths an owner can take when embarking on a transaction—a direct deal with investors or a process intermediated by an investment banker. We want to share some of the wisdom we’ve gained from our conversations and experiences in the hope it might be of service to owners on the brink of choosing one of these two paths.
1: Are you committed to selling?
Hiring an investment banker sets a lot of machinery in motion. Once the gears start turning, events tend to acquire momentum of their own. Managing the process can generate significant work for your company’s management team and demand a great deal of time, attention, and resources.
Most business broker and investment banking sellside agreements also come with weighty “tails” that, in the event of a broken process, oblige you to use that same advisor for future sale processes.
If you have a strong conviction that now is the time to sell or raise capital, this can be the right move. But if you’re more in a mindset of wanting to “test the waters” and think you would transact only at the right price and with the right partner, you might be better suited to consider a direct deal—which usually entails a qualified offer with no commitments. That flexibility can be quite valuable once you get into the deep waters.
2: How well do you want to know your buyer?
In most banker-led processes, the business owner spends fewer than 10 hours with bidders before selecting one with whom to sign an exclusive Letter of Intent.
This always amazes me. You’ve spent 10, 20—maybe more than 30 years—building a business that you consider your “second family.” And now, you’re asked to decide the fate of that second family in under 10 hours.
Southerners that we are, we prefer to take things at a more refined pace. When we’re first getting to know a company, we like to tailgate and watch a college football game, break bread a few times, maybe troll the Intracoastal Waterway in a center console (a Sailfish, of course). We don’t avoid intermediated processes, but we do have a strong preference for working directly with business owners—we get to work on your timetable, not one set by bankers, and we get the chance to develop a real relationship.
3: How important is keeping the transaction process confidential?
Despite the non-disclosure agreements signed at every step of an investment banking process, word tends to get out. Even a “narrow” process (which in the middle-market investment banking world might mean sending teasers to a dozen potential buyers) can involve preliminary outreach to competitors, vendors, and others. Given that transactions can end up not closing for one reason or another, you could jeopardize revenue, relationships, or competitive position for nothing. Even worse, you could decide to go through with a transaction you’re not all that happy about simply because it’s preferable to a failed deal.
A direct sale or investment has far fewer players involved and far fewer opportunities to develop market awareness of the potential transaction. Again, if you’re certain you want to transact, this may not be a huge issue for you.
4: How confident are you about the value of your company?
Here’s where investment bankers really earn their money. If your company has a “secret sauce” or is in a sector that’s particularly hot at the moment and there is so-called “spike valuation” to be achieved, a sellside process can create the Sotheby’s-like atmosphere that drives up a sale price.
More likely, if you’re among the 80% of owners who have a pretty good idea of what their business is worth, there are other ways to gain confidence around a figure other than simply accepting the valuation of a potential buyer in a direct sale or investment. Between valuation professionals inside accounting firms, standalone valuation practices, and M&A professionals willing to provide valuation advice, many sources can refine or validate your sense of what your business is worth.
Using What You Already Have
You can also conduct your own form of preliminary due diligence. You may already know of a handful of potential buyers with whom you can arrange friendly, informal meetings to get a general sense of the market. And confidential conversations with other CEOs in your industry who have completed transactions may also give you an understanding of how their experience might inform the approach you want to take.
That initial meeting I mentioned before with Paul ended up in a great partnership between Georgia Oak and Sailfish Boats. We’ve also invested in companies that were represented by fantastic investment bankers. No matter how you choose to approach a sale or capital raise, it is essential to know where you want to end up and be comfortable with the road you’re taking to get there. Our team hopes to meet you along the way.
About the author
Michael Lonergan works with Georgia Oak’s partner companies to grow revenue, while also evaluating new investment opportunities. Michael’s Georgia roots helped shape our mission and commitment to promoting economic growth and sustainability throughout the state and the broader Southeast.
Any questions for us? We’re always happy to answer them.
Feel free to email me at Mike@GeorgiaOakPartners.com.
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