March 23, 2023

TPL Insights #163 – Leveraging the Right Investment Banker to Ensure the Long-Term Value of Your Business

By Rob Andrews

By Rob Andrews

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And without any further ado, here is TPL Insights #163:

As a founder CEO, you may have heard that you should run your business like you’re going to sell it one day, even if you intend to keep it for future generations. You may also have heard that you should run it like you’ll never sell it, even if you’re actively working toward a transaction.  Contradiction in terms? Not really. Running your business on principles like purpose, mission, vision and values, a clear strategy that flows from those principles,  a strong unified leadership team, scalable processes and clean books makes sense for every business. In other words, build your business to last.

As a founder CEO, you employ service providers of every ilk: lawyers, accountants, consultants, and an array of service providers. They are all important and have the potential to add major value to your enterprise. You may be overlooking one of your most valuable resources: the right investment banker. Most founders who are contemplating a sale, think of investment bankers when they get ready to sell. In my view, that is like going to your commercial banker when you need a line of credit. The time to establish a business banking relationship is well before you need funding, and the same applies to an investment banking relationship. The right investment banker, while few and far between, can be invaluable to help you properly prepare your business for sale, and help you find the right buyer. A minimal investment in time, and perhaps even paying a retainer, to develop a relationship with a banker you know, like and trust can pay off in spades.

I stress finding the right investment banker, because there is a big difference between the garden variety banker who can give you an objective view of what your business might be worth and take it to market, and one who can, and will, act as a trusted advisor, keeping your best interests at heart and doing what they can do to protect you from making decisions you’ll live to regret. In this piece, I discuss three levels of investment bankers, each of which is appropriate for certain kinds of sellers (and buyers).

The Garden Variety Banker

This variety is just fine for some sellers. Most investment bankers know valuation inside out, backwards, and forwards. Most are keenly aware of industry trends, competitive landscape, and the basics of maximizing enterprise value. Any reputable investment banker can give you an unbiased assessment of your business and can help shape medium and long-term strategies for optimizing your company’s value. Most can help you think through different types of buyers, weighing the pros and cons of each, and helping you focus on a sale to a specific kind of acquirer.

Most bankers are highly skilled at evaluating the condition of your financial position, quality of earnings and practices that might affect your ability to optimize a transaction. It is very common for founder CEOs to have to clean up their books and/or produce recast statements that reflect actual financial performance after removing extraneous family related expenses not necessary to run the business. Recasting can also mean writing down accounts receivable, unsellable inventories, and removing assets that will not transfer to the new buyer. In other words, making sure your books and financial practices are squeaky clean.

The Better than Average Banker

I recommend this variety for those founder CEOs who have intricate knowledge of their businesses, but need help understanding the defects and risks that might be glaringly obvious to skilled private equity principals, growth or strategic buyers. A better than average banker has learned to think like each kind of buyer who might acquire your business. They are able to do a quick SWOT analysis and compare your business to your industry peers, best practices in similar industries, and where you are under or over performing your competition. Good bankers will do a review of your customer base, to ensure recurring revenue and that your revenue base is diverse, not dependent on a small group of customers.

The better than average banker can also advise you if they believe your organization is too lean or too fat. The former is far more common as founders tend to be frugal. Prudence is great, but being overly frugal can dramatically affect your sale. To the extent your business can run without you, it is infinitely more valuable. It is quite common for investment bankers to call my firm in when they identify weakness in the leadership team and key department heads in a company they are trying to help sell. Savvy bankers know that knowledgeable buyers will quickly identify organizational weaknesses and automatically adjust your expense profile if they believe buyers will have to strengthen your leadership team or infrastructure after the acquisition.

Good investment bankers will advise you to ensure your leadership team is rock solid, and includes strong operations, finance and human resources professionals at a bare minimum. You are far better off to make these changes and solidify your team well in advance of going to market. Private equity buyers I know, don’t want to have to make those changes after the fact. They will also advise you to make sure your enterprise looks good esthetically. Having your facility in great condition, with current fixtures, equipment and furniture sends a signal that the business has been well taken care of.

The above average banker can advise you to focus on the most valuable parts of your business. We know of one founder who was surprised to learn that while his business overall was valued at 7X EBITDA, a single part of the business was valued at 13X EBITDA. This realization enabled the CEO to redirect resources from the lower valued division to the higher valued ones. Founder led companies often pour resources into areas of their businesses that are underperforming or whose value, ultimately, may prove to be far less valuable than others. By overlooking the importance of timely and detailed valuations, your competitors may fall into that trap, but you don’t have to.

The Stellar Investment Banker

This banker gets it. This is the one you want if you envision your business surviving and thriving after you sell it. Don’t ignore the statistics. Approximately 74% of acquisitions fail, and only 3% do better on the other side of the transaction. In my four decades running businesses and consulting, I have met very few founders who don’t want their babies to thrive once they’ve stepped aside.

The stellar banker wonders how so many exceptionally talented professionals enter so many mergers and acquisitions that are predestined to fail. They are tired of seeing founders sell successful businesses to buyers who run them into the side of the mountain in record time. They are sick of seeing buyers acquire solid brands and immediately start to disassemble the enterprise without taking time to figure out what they’ve bought. They’re frustrated at seeing founders abandon the secret sauce that made them successful in the first place to pursue expansion strategies that ultimately spell their demise.

The great ones hope they can save a few business leaders from making mistakes that destroy massive enterprise value and disrupt countless lives. These are the ones that are not consumed with what Jim Collins calls the quantitative bias. I have read hundreds of CIMs (Confidential Information Memorandum) and have found the majority of them woefully inadequate. If you’re running a business that is special, you need a special investment banker. If you’ve built one of those Top 5% of all businesses, you need a Top 5% investment banker. According to Accenture’s December 2022 report, only 5% of companies follow through on disciplined human capital practices. Those who do, give their cultures credit for 30% of their enterprise value.

Great bankers recognize powerful cultures when they see them and know they command premium multiples. They also know they have to be very deliberate in selecting buyers. They know who the good guys are. They know the growth buyers and private equity principals who are likely to value, preserve and nurture strong positive cultures. They understand that peak performing cultures, and the unique brand of leadership that built them constitute the only sustainable competitive advantage. If you’ve built one of these enduring enterprises, stack the deck in your favor with the right investment banker. Give us a call and let us help you find the right one.

Warmest Regards,