Valuetainment - September 14, 2021


Hiring An Investment Banker To Sell Your Business？ - 11 Things You Need To know First


Episode Stats

Length

12 minutes

Words per Minute

242.62077

Word Count

2,918

Sentence Count

222


Summary


Transcript

00:00:00.000 So let's just say you've got a profitable business and a buyer approaches you.
00:00:02.720 Somebody wants to buy your business.
00:00:04.140 Maybe you want to raise more capital.
00:00:05.900 Maybe you're thinking about raising some debt and you have to go hire an investment banker.
00:00:10.080 What do you do?
00:00:11.020 We're going to talk about that today.
00:00:16.940 So two things.
00:00:17.780 If you get value from today's content, give it a thumbs up and subscribe to the channel.
00:00:20.820 And I got a PDF for you at the end, so stick around.
00:00:23.080 So let's go through it.
00:00:23.960 Seven reasons to hire an investment banker.
00:00:25.980 Number one, a buyer has approached you.
00:00:28.120 They like your business.
00:00:29.220 They say, hey, we want to buy your business.
00:00:31.640 We like what you're doing.
00:00:32.460 Let's start talking.
00:00:33.600 You don't know what your business is worth.
00:00:35.480 You don't want to sell it too cheap.
00:00:36.940 You don't want to say, you're like, I don't know what to do.
00:00:38.900 Maybe that's the reason you ought to hire an investment banker.
00:00:40.780 Number two, you want to raise some expansion capital.
00:00:43.220 You're starting to realize maybe you can get into five markets if you add an additional $20 million.
00:00:47.880 Maybe if you hire certain engineers, you can expand.
00:00:50.920 Maybe there's certain things you can do with your current software, but you need an additional $5, $10, $15, $20, $100 million.
00:00:57.000 That's expansion capital.
00:00:58.180 You need an investment banker.
00:00:59.440 Number three, negotiating an acquisition.
00:01:01.760 You're about to buy another business.
00:01:02.960 You guys are coming together.
00:01:03.860 You need one.
00:01:04.720 Number four, about to sell a portion or entire business in the next 12 to 24 months.
00:01:09.160 The sale process is not like, I'm going to buy, I'm going to sell my house.
00:01:12.220 60 days later, you sell a house.
00:01:13.800 Doesn't work like that.
00:01:14.920 Generally, it takes a little longer.
00:01:16.680 Five, succession plan.
00:01:17.900 Six, capital constraint.
00:01:19.780 Times are tough for you.
00:01:21.200 You're running an airline like airline industry needs money.
00:01:23.720 Times are tough.
00:01:24.400 You're running a business.
00:01:25.080 Things are, maybe you're growing too fast.
00:01:27.400 You don't have money, but if you have the money, you're showing you're growing, but your profit margins, because you're not going to get the money back for three, six months.
00:01:35.760 So you have to go to somebody, raise money.
00:01:37.320 You get capital restraints.
00:01:38.620 And last but not least, you're simply trying to learn the process of what it's like if you hire an investment banker and go on the market to see if there's any interest for the business that you have.
00:01:46.740 So having said that, 11 things to know before you hire that investment banker.
00:01:51.220 Number one, do they know your industry?
00:01:54.100 For example, if I am sitting with an investment banker and he's an expert in pharmaceutical companies.
00:02:01.120 He sold the last 20 companies he sold, they're all pharmaceutical companies, but on financial industry, it doesn't matter.
00:02:07.140 He could be the best in that industry.
00:02:09.220 His Rolodex is people from that industry.
00:02:11.760 So investment banker who knows nothing about your industry, even though they may be the best, it's irrelevant.
00:02:17.920 Typically, you want somebody that's in your industry because they have the expertise.
00:02:21.740 Number two, how many deals have they done in your industry recently?
00:02:25.960 So, for example, you'll ask the question, so they'll say to you, let's just say you're a real estate company.
00:02:31.140 Well, yeah, you know, I have a, we've done real estate deals and, you know, upwards of raising $50 million.
00:02:37.120 And we've also sold a couple of real estate companies for $200 million or $300 million.
00:02:41.300 Great.
00:02:41.700 Which ones are they?
00:02:42.480 They'll show you the list of companies, XYZ company, ABC, and all this stuff they'll give you.
00:02:47.340 And you say, were you a lead banker on this?
00:02:49.480 Oh, no, we were doing it with XY, you know, such and such other investment banker.
00:02:53.560 But were you the lead or were they the lead?
00:02:54.840 They were the lead, but we were still working to get as a team.
00:02:57.640 They're not a lead.
00:02:58.280 So, they're still small to the other guy.
00:02:59.580 So, maybe you're right then.
00:03:00.640 Who was the person you were, oh, we were working with, you know, John, whatever.
00:03:04.300 Okay, got it.
00:03:04.980 Perfect.
00:03:05.360 You're starting to learn to see if they're a leader on these deals or not.
00:03:08.840 And they'll give you these stories.
00:03:09.780 Sometimes they're going to say, yeah, we did that.
00:03:11.820 You know, like, well, you did that.
00:03:12.700 Oh, yeah, we led the whole thing.
00:03:13.740 Did you have anybody else?
00:03:14.500 No, it was all us the entire way.
00:03:16.420 Did you do the other?
00:03:17.220 Yeah, we also did this one.
00:03:18.200 Did you do that?
00:03:18.660 We also did this one.
00:03:19.560 So, this may be the investment banker that it's no longer about them selling you.
00:03:25.660 Now, it's more about you selling them because they're the ones that are going to get to the
00:03:29.260 buyers that you want to talk to.
00:03:31.160 So, you have to understand who they are, what type of experience they got.
00:03:34.220 Number three, size of the deal.
00:03:36.160 I've sat down with investment bankers when we go to New York and sit down and talk to
00:03:39.060 some of these guys.
00:03:40.080 Yeah, we sell insurance companies.
00:03:41.780 What size?
00:03:42.280 25 million, 50 million, 100 million.
00:03:43.940 Too small.
00:03:45.020 So, some people's size of deal they do is too small.
00:03:48.600 Some people's size of deal they do is way too big.
00:03:50.960 I spoke to the Goldman Sachs investment bankers.
00:03:52.880 They said, listen, our minimum is a $2 billion sale, $3 billion sale.
00:03:57.060 Great.
00:03:58.020 SPACs that we do, we don't do any SPACs less than a billion dollars.
00:04:00.900 Great.
00:04:01.440 But you're understanding their size.
00:04:03.300 So, you don't want somebody that's too big because they're going to be so bored of selling
00:04:07.300 your property, your business, and you don't want anybody too small.
00:04:10.200 The best way to look at it is the following way.
00:04:12.720 Say you have a million dollar home for sale.
00:04:15.260 You don't want to talk to a realtor who's never sold a million dollar home.
00:04:17.920 They only sell $400,000 homes.
00:04:19.780 But you also don't want to talk to the realtor that only sells $20 million homes because he's
00:04:23.260 not interested in the commissions of selling a $1 million home.
00:04:26.300 Hopefully, that makes sense.
00:04:27.400 That's why you asked the size of the deal.
00:04:28.780 Number four, are they telling you what you want to hear?
00:04:31.200 Are they telling you what you need to hear?
00:04:33.380 If a person that's an investment banker, the amateur one gets typically too excited,
00:04:38.900 oh, we're going to get you exactly the price.
00:04:40.780 When I think we can even do more, that's rookie realtors say things like that.
00:04:44.680 That's rookie investment background telling you things like that.
00:04:47.140 And you, if you get excited, that's also a reflection of you being a rookie in a market
00:04:51.580 that you've never dealt with this before.
00:04:52.900 And you get, oh my God, he said he can get us, you know, 40 EBITDA, 20 times EBITDA.
00:04:57.560 He's just getting you excited, right?
00:04:59.080 Depending on what they're doing.
00:05:00.440 Versus somebody says, I hate, what are your numbers?
00:05:04.140 Well, here's the challenge that we're going to face.
00:05:05.620 Are you prepared for that?
00:05:06.620 Because what do you think your business has worked?
00:05:08.280 I don't think the market's paying that today.
00:05:10.060 Here's what the market is paying.
00:05:11.180 Let's look at the comps.
00:05:12.200 This is what it's looking like.
00:05:13.820 You know, if your expectation is to get something like this, how are we going to make that case
00:05:17.520 to get to the number that you want?
00:05:18.920 You're not necessarily a tech-enabled business yet.
00:05:21.040 You don't have a management team yet.
00:05:23.080 You know, what's your, you know, supporting cast look like?
00:05:25.780 So I don't think you're ready.
00:05:27.080 Or what's your management team like this?
00:05:28.780 Oh, wow.
00:05:29.200 That's your management team?
00:05:30.080 Yes.
00:05:30.260 Oh, what's your support team?
00:05:32.100 What's offered yet?
00:05:32.980 Oh, you are, oh, we could go for a number like this.
00:05:35.240 But if they're just telling you what you want to hear, they're not telling you what you
00:05:38.240 need to hear, may not be the guy for you.
00:05:40.180 Number five, ask for a list of contacts they plan on approaching.
00:05:43.260 For example, say you've spent hours and hours with them.
00:05:45.620 So Johnny, let me ask you, based on what now, what you know now about our business, who do
00:05:49.260 you think would be a potential buy for something like this?
00:05:52.040 Well, here's a list of 40 people that I would probably approach.
00:05:54.880 And these are some of the companies that we'd be talking about, that we've done business
00:05:57.500 before.
00:05:57.900 And they take our calls because we've done three deals with these guys, four deals with
00:06:02.420 these guys, and then they'll show you.
00:06:04.080 Some of them are in this field, some of them are in this field, but they're kind of giving
00:06:06.920 you an idea of what the buyer could potentially look like based on the context that they have.
00:06:11.740 Do they ask you the right questions?
00:06:13.600 So the right questions are technical questions.
00:06:16.180 So for example, so the C-suite executives you've hired, how much experience did they have with
00:06:21.380 your company?
00:06:21.740 How long have they been there?
00:06:22.820 Have they only been there for a month or two?
00:06:24.600 Or have they been around for a year plus?
00:06:26.540 Well, okay, so they have to now think, okay, so in regards to your EBITDA, what's your
00:06:31.460 EBITDA look like the last 12 months, 24 months, 36 months, 48 months?
00:06:34.620 Here's what it looks like.
00:06:35.580 Okay, that sounds good.
00:06:36.440 What's your top line revenue looking like?
00:06:37.720 Maybe EBITDA is going up or your top line revenue is not going up.
00:06:40.340 What's the problem there?
00:06:41.220 Are you just figuring out ways to make more profit?
00:06:43.600 Because that doesn't, they have to ask the right question.
00:06:46.360 Like the questions that you're hoping they don't ask you, they have to ask you.
00:06:48.920 That's what a great investment banker does because they have to know that the buyer is
00:06:52.620 going to want to know that stuff.
00:06:53.560 So they better know those things now before they go into the market to talk to buyers.
00:06:57.420 Number seven, do they have a solid team around them?
00:06:59.800 The lead guy, you want to be able to buy into the lead guy or the lead gal, but then who
00:07:03.620 else is around them?
00:07:04.480 Who else is supporting where they're going to be able to say, here's what I think.
00:07:07.700 Here's what I think with this.
00:07:08.520 Because sometimes when you go into a room with investment bankers, they'll have, typically
00:07:11.760 it's a group of three people that will talk to you.
00:07:13.580 The lead, the co, and then the person that's the junior analyst that's sitting there trying
00:07:18.680 to figure out a way to maybe not get the deal done.
00:07:21.660 One person's very excited about doing the deal.
00:07:24.120 One person is not excited about doing the deal.
00:07:26.660 One person knows nothing about the deal, but they're reasonable and they're willing to
00:07:29.680 sit there and talk.
00:07:30.300 That's typically the dynamics of the three people that are in the room.
00:07:33.220 So it's a form of getting audited, but you want to know who their team is well.
00:07:36.040 Number eight, what do they think the buyer will look like?
00:07:38.020 Will it be a strategic?
00:07:38.980 Will it be a PE firm?
00:07:39.720 Will it be a bank?
00:07:40.700 So they may say, I don't think a strategic is going to be interested in your company.
00:07:43.920 Why?
00:07:44.720 Here's why.
00:07:45.320 Okay, I don't think a private equity firm is going to be interested in your company.
00:07:48.780 Here's why.
00:07:49.760 I don't think a bank's going to buy something like this into your company.
00:07:52.860 I think bank may be it.
00:07:54.000 I think private equity, I think strategic may be good.
00:07:56.560 They're going to probably ask you the following seven questions.
00:07:58.720 Are you ready for these following eight questions?
00:08:00.460 So then they'll start asking you questions that a buyer is asking, but you have to know
00:08:04.140 what they think the buyer is going to look like.
00:08:06.280 So they'll say, there's probably a 5% chance it's going to be a PE firm.
00:08:09.900 I think 95% chance it's going to be strategic.
00:08:11.960 Oh, really?
00:08:12.400 Yes.
00:08:13.240 Okay, fantastic.
00:08:14.040 Let's look at what that, let's see what that looks like.
00:08:15.940 Number nine, ask them why they believe they can do the job.
00:08:18.300 Like, why can't they go raise the money or do the acquisition?
00:08:22.200 Why can't they help you sell the company?
00:08:24.460 Why did it?
00:08:24.860 Well, I think we can do it because of pop, pop, pop, pop, pop.
00:08:27.160 Great.
00:08:27.540 Very helpful.
00:08:28.120 Number 10, understand fee structure.
00:08:30.120 Fee structure works out in different ways.
00:08:32.320 Some may ask for money upfront.
00:08:34.060 Now, money upfront may be if you're doing a deal that the commission is going to end up
00:08:38.480 being 5 million bucks, 10 million bucks, a million dollars.
00:08:41.980 Let's just use a million dollars.
00:08:43.360 That's an easy fee.
00:08:44.580 If they're asking for a quarter upfront, they're not going to do the job.
00:08:48.480 Like, but if they say, hey, I need $20,000, $50,000, $100,000, because that's going to cover
00:08:54.280 our fees until we get paid.
00:08:56.220 These guys are not doing this business for a $20,000 check.
00:08:58.680 $20,000 check for an investment macro means nothing.
00:09:02.200 $50,000 is nothing.
00:09:03.360 They're trying to get a, you know, two, five, $10 million check.
00:09:07.240 That's what they're going for.
00:09:08.820 So if there's a little bit of money upfront, you can negotiate that.
00:09:11.740 You don't want it to be too much.
00:09:12.920 You want it to be enough when they're doing the traveling dinner, all that stuff that they
00:09:15.500 got to cover.
00:09:17.280 That part makes sense.
00:09:18.340 The second one is fee structure, how they put it up.
00:09:20.940 Hey, we're going to get, if it's a smaller company, they're going to get a bigger percentage.
00:09:25.720 If it's a bigger company, they're going to get a smaller percent.
00:09:28.060 So for example, hey, it's, I'm a 1%, I'm 2%, I'm 3%, I'm 4%.
00:09:32.300 They'll put their number up there, right?
00:09:34.380 You can come back and say, I want it to be tiers.
00:09:38.220 So if you sell it between, you know, 50 to 100 million, it's this price.
00:09:43.320 100 to 150 million, it's this price.
00:09:45.380 200 to 500 million, it's this price.
00:09:47.120 Whatever the tiers you put up.
00:09:48.680 And you can say, the more you sell it for, you know, the percentage is going to be whatever.
00:09:52.400 That's something that you can negotiate with your investment banker.
00:09:54.720 And last but not least, it's the earn out.
00:09:56.860 Sometimes the investment banker is going to want to get the whole money upfront, even though
00:09:59.960 you as the buyer haven't gotten the full money from the seller yet, from the buyer yet, because
00:10:05.000 they want to do an earn out.
00:10:06.340 Maybe they'll give you 90% money upfront and you'll earn out the 10.
00:10:09.460 Maybe they'll give you 80% upfront and they'll earn out the 20.
00:10:12.300 But the investment banker wants to get paid on the 80 and the 20 upfront.
00:10:15.240 Whether that 20 happens or not, you can't, obviously that's your ability to negotiate,
00:10:19.040 but you need to know that that's what they're going to be asking you when you do a deal with
00:10:21.440 them.
00:10:21.540 And last but not least, ask for the last five deals that didn't go through and why.
00:10:27.500 So John, this is great.
00:10:28.680 You guys got a lot of experience.
00:10:29.780 It sounds really good.
00:10:30.580 I think we're getting kind of to a point where we're comfortable with this.
00:10:32.680 This is our sixth meeting together.
00:10:34.380 Can you tell me about the last five deals you guys didn't do and why?
00:10:38.360 Well, yeah, great.
00:10:39.620 I'm glad you're asking that question.
00:10:40.920 Number one, one of the deals that we didn't do because the CEO was not willing to stay
00:10:45.600 with the company.
00:10:46.360 And he told us at first he was, and then he changed his mind.
00:10:48.520 The buyer's like, what do you mean?
00:10:49.240 We can't buy this business.
00:10:50.180 He has no other leadership team.
00:10:51.780 There's no way we can buy a business like this.
00:10:53.240 No problem.
00:10:54.220 The other one is we made a mistake.
00:10:55.660 We didn't do enough due diligence.
00:10:57.560 And because of that, now we've added this additional due diligence process of three
00:11:00.620 hours of asking questions, coming to your home office, learning about your management
00:11:03.780 team.
00:11:04.680 Whatever it is, they're going to tell you the five deals that didn't go through because
00:11:07.780 you are going to learn the most based on that question on deals that didn't go through,
00:11:12.080 not deals that did go through.
00:11:13.400 This is what you want to know.
00:11:14.820 And you can ask that question from all the 10 different investment bankers you'll interview.
00:11:19.500 You'll get so much knowledge from doing that.
00:11:21.100 So having said that, if you took a lot away from today's episode, I have a PDF for you
00:11:26.920 as well.
00:11:27.440 Give it a thumbs up if you learned a lot today and subscribe to the channel and text the
00:11:31.320 word INVESTMENTBANKER to 310-340-1132.
00:11:37.320 310-340-1132.
00:11:39.700 Text the word INVESTMENTBANKER.
00:11:41.200 We'll send you a PDF of all the things that was written here today.
00:11:44.080 And if you're out of the country, you're not in the States, go in the description, click
00:11:47.560 on a link below, subscribe to our newsletter, and we'll send a PDF to you as well.
00:11:50.440 But if you enjoyed this video, I've got another video for you titled, How to Raise Money.
00:11:55.520 If you've never seen this video, it's very detailed on how to raise money.
00:11:59.580 Click over here to watch the video.
00:12:00.700 Take care, everybody.
00:12:01.360 Bye-bye.