How to Choose an Investment Banker

Bob Buchanan

National Practice Leader, Business Transition Planning

Comerica Wealth Management

Key Takeaways:

• A strong investment banking partner can save you time and effort so you can focus on what you do best as a leader: run the business.
• Steps to choose the best investment banker include understanding their role, identifying your needs, researching potential bankers, asking the right questions, evaluating proposals and making the final decision.
• Key factors to consider when evaluating potential investment bankers include their experience, qualifications, team size, process and fees.

An investment banker is a financial services professional who helps facilitate large financial transactions, such as a capital raise, merger, sale or acquisition.

The right team makes all the difference when navigating complex financial transactions. And few transactions bring more complexity than raising third-party capital or engaging in mergers and acquisitions. That’s why many businesses, once they’ve committed to a plan of action, bring on an investment banking partner.

A strong investment banking partner is priceless. They save you valuable time, ensure the right due diligence and preparation is done upfront, craft and deliver the right marketing pitch, and get your deal across the finish line. Their efforts free you up to do what you do best as a leader: run the business. Inversely, the wrong partner can wreck your plans. You wind up with wasted resources or lost opportunities, maybe even sub-par price and/or terms. You can even miss out on the transaction altogether. With so much on the line, it’s important to choose the best investment banker. But, as a business leader, you may not know how, or what to look for. You may be inundated with proposals or unsure how to initiate the process. You may not know what questions to ask.

In this article, we’ll walk through a simple, six-step process to help you assess potential partners and put your transaction in the right hands.?

Step 1: Understand the Role of an Investment Banker

Before calling a banker, make sure you know what you’re calling to discuss. Make sure you understand the role of an investment banker— what the banking team should bring to the table, and what aspects of the transaction they will oversee. Top line, an investment banker is a financial services professional who helps facilitate large financial transactions, such as a capital raise, merger, sale or acquisition. They are usually industry experts with deep subject-matter knowledge in the field and knowledge of current trends. They’re also experts in guiding transactions from start to finish. A strong investment banker brings a wealth of experience in managing the details of the transaction, including research, data analysis, marketing, documentation, negotiation, written and verbal communication, and more.

A strong investment banking team is composed of a diverse group of professionals, each with added expertise in a specific area. Additionally, investment banks and individual bankers may specialize. Specialist categories include the size of transaction, such as bulge-bracket, middle-market, or boutique. They also include the type of transaction, with some firms focusing on M&A involving public companies, including hostile takeovers and board fights, some focusing on serving private companies, some that spend most of their time focused on private equity and other large pools of capital and others who focus on equity capital raises through IPOs and public share offerings. One firm may focus only on a narrow industry sector (e.g., software companies, or trucking companies), while another may have knowledge and experience across a range of industries and sectors.

Knowing the role, strengths, and specialization(s) of an investment banker can help you narrow down your search and identify the right firm for your needs.?

Step 2: Identify Your Needs?

The right investment banking partner is the one that meets your needs. So, before you consider potential partners, first identify the needs of your transaction.

Transaction Type:?What aspects are unique to your transaction? It’s important to align these factors with the investment banking team. If, for example, you’re working on a large transaction, you’ll need a robust team for support. And if you’re working on a niche transaction, you may need a highly-specialized team. Take time to identify the transaction type you’re looking to execute.

Industry:?Does your transaction have industry-specific needs? If so, you may want to consider an investment banking team that has prior sector experience, or a specialization in your industry. Specialized firms can bring a wealth of industry knowledge and experience. However, they may also have established relationships in your industry that could lead to conflicts of interest. It’s important to vet any potential partner closely to make sure they’re positioned to prioritize your transaction.

Culture:?What type of team will you work with best? Here, you’ll want to look internally at the team responsible for seeing the transaction across the finish line. Identify the culture and values of your team and your company. Then, when considering potential partners you can assess fit and trust levels.

Experience:?What is the experience level of the bankers who will work on your deal? Have they worked on similar deals before? Do they have the perspective and judgment to add value and protect your interests throughout a complicated, high-stakes process? As you conclude this step, you should walk away with a list of prioritized needs that will inform your search strategy.

Step 3: Research Potential Investment Bankers?

Do your homework. Time invested upfront to research potential partners will pay off later as you interview investment bankers.?

First, it’s recommended to reach out for referrals. Tap your network of trusted peers to find out which investment bank they’ve worked with. Ask about their experience, including the level of service and the results of the transaction. This process will help you identify banks and get an inside view to how they operate.?Second, conduct online research. Start by verifying the FINRA licensing for any investment bank and investment bankers you’re considering. This is a minimum requirement. From there, you can look at online write-ups and reviews. Different firms often have a “brand” associated with the firm name, one that most substantial firms are careful to protect and nurture. While the “brand” can provide useful insight as to your likely experience, remember that at the end of the day you’re hiring the people you’ve met, not a building or a logo.

As a warning, pay close attention to any mention of “bucket shops.” These are investment banks with a reputation for taking on a high number of clients, but closing a small number of transactions. Bucket shops convert at a low rate and generally do not provide high value service to their clients. The term “bucket shop” can also sometimes refer to securities firms, business brokers and other entities that cut corners or play fast and loose with a short-term, selfinterested attitude and approach. If you run across one of these, head the other way!

Finally, narrow down your list. Identify specific team members you would be working with on the transaction. And ensure the investment banking team has the staffing needed to support your deal. Typically, this means a minimum of 3 or 4 team members. Look out for the “bait and switch” - be careful to ensure that the investment banking team that “pitches” the firm to you is the same team that will actually work on your project.

Once you’ve conducted your research, you’re ready to reach out for a consultation.

Step 4: Ask the Right Questions

While many investment banks prioritize the needs of their clients, this is not always the case. Some banks, such as previously mentioned “bucket shops,” focus on closing the deal over everything else. As such, you need to ask the right questions to break through sales speak and ensure you’re working with a quality partner. To start, ask about the team. Gather information on their size, as well as their experience and qualifications. Also, ask about recent deals they’ve closed, and transactions they’ve worked on in the past that might have relevance to your deal.?

Whenever possible, request qualifying information in writing. A team may exaggerate numbers over the phone but will be less likely to do so in writing.?

From there, clarify the team’s process and timelines. Make sure you understand what it will look like to work with them on a day-to-day basis, who will be your main points of contact, and what you can expect in terms of communication and turnaround time. At this stage, it can also be helpful to identify the team’s methodology for valuing your business. Ask questions like, “What do you think my business is worth and why?” and “What do you think are the most significant issues that may reduce buyer interest or the value of my company? Why?”

Continue with discussion of fees and engagement terms. Start with what the fees are and how they apply. This includes pricing-based percentages and breakpoints. Then, talk about the terms of the engagement. Pay special attention to any “tail” that could extend the terms – anything beyond 12-18 months would need justification. Be sure to review timeline benchmarks that ensure the transaction is progressing. Lastly, a best practice is to consult with more than one firm. Speaking with multiple firms will enable you to compare discussions and terms, helping you spot important trends.?

Step 5: Evaluate Proposals and Engagement Letters

Following your consultation, banks will submit proposals, term sheets, and engagement letters. This is where you consider the full package and begin to formulate your final opinion. Start with a thorough review of the documentation. Consider the terms of the agreement, including proposed retainer and success fee structures and payment terms. This will help you size up the cost comparison between banks.

Also, take a close look at the firm’s proposed strategy. How are they planning to engage with your transaction? Likely, each firm will put forward their own unique approach. You can consider these approaches to see which one aligns most closely with your goals and objectives.

Once you have a strong understanding of the proposed terms and strategy, you move forward to negotiation. Here, you can negotiate on fees, such as structuring the fee agreement to create strong incentives for your bankers to perform. You can also negotiate on other terms of the contract, such as cancellation, break-up fees or a cap on expenses. Taken together, this step of the process should conclude with all the information you need to fully assess your potential bankers.?

Step 6: Make the Final Decision

Review the outputs from steps 1-5, taking special note of your needs and priorities. Consider the alignment between the goals you set at the start of the process and the information you received from potential partners. How closely do they align? It can sometimes be helpful to bring along a trusted outside advisor to provide a second viewpoint as you consider the finalists. Share the details with a member of your leadership team, for example, to see if they notice any red flags or important points. Many times the subjective elements surrounding a particular firm or adviser can be just as important as what’s written down on paper. Don’t be afraid to trust your instincts and your gut reaction. Finally, don’t be afraid to take a few steps back. If, after a full review of the information, you feel like something’s missing, it may be worth the time to meet with additional investment banks. The right partner is worth seeking out.

Conclusion?

With this six-step process, you’re on your way to choosing the right investment banker who will partner with you to achieve success. By conducting thorough research, and asking the right questions, you can set your business up for success. You can also avoid banking partners who don’t have your best interest in mind or lack the expertise needed to navigate the complexities of your transaction. Ultimately, the right partner is invaluable. They enable you to focus on running the business, while they handle research, documentation, negotiation, and more. This results in a fully-vetted transaction that will provide long-term value for your business. For more information or additional resources for understanding best practices in the hiring of an investment banking adviser, contact Comerica’s Business Transition Planning Team.?

Get started on your business transition journey.

Schedule your 30-minute assessment with Bob.

Robert Buchanan ASA, CFP? VP, National Practice Leader, Business Transition Planning,?Comerica Wealth Management

Want?to know more?

Comerica welcomes the?opportunity to help. Contact your Comerica Relationship Manager or Bob Buchanan, VP, National Practice Leader, Business Transition Planning?at?comerica.com/businesstransition .

NOTE: IMPORTANT INFORMATION

This is not a complete analysis of every material fact regarding any company, industry or security. The information and materials herein have been obtained from sources we consider to be reliable, but Comerica Wealth Management does not warrant, or guarantee, its completeness or accuracy. Materials prepared by Comerica Wealth Management personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Comerica Wealth Management, including investment banking personnel.

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