106: Investment Banks
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As you suspected, investment bankers are the guys in the blue suit jackets walking the trade show floor. If you have ever been to Expo West, you know they are in abundance. Choose your banker wisely. He or she is the only person you will ever pay $1 million cash (or more) in one gig. More importantly, you will entrust this person with your life’s work. Do your due diligence.
We will cover fees structures first because I want you to appreciate just how important a partner you are considering. For M&A transactions, you’ll pay anywhere from $20K to $100K in retainers (sometimes more), and between 2% and 8% of your Company. Almost always, you’ll pay at least $500K all in, often up to $2 million.
What if you don’t like them? You can simply fire them, right? Not usually. They usually structure their engagements where you are engaged for a minimum period and they have exclusive rights for upwards of 6 months before you can break up, usually for at least 12 months. You can easily be locked up for 2 years.
Not enough is said about choosing the right banker. You need to be extremely thoughtful and rigorous in terms of (1) whom you hire and (2) when to hire them.
The Buddy System
It may be worth hiring someone from the food industry to be your advisor in choosing a bank. There are former entrepreneurs in the space who have done this a few times over. They can keep the banker honest.
Whom You Choose to Hire
The name on the door matters a lot less than the individual. If you are paying someone this much, you absolutely must find the right person. Look past the tombstones on their websites. More important than the trophies of yesteryear are what they can do for you today. Have you tested them out? Have they been impeccably prepared and thoughtful? Do they clearly understand what your company does and who should pay the most for it? If you are thinking about using them for a raise, have they ever closed one? Are they open with you about what they have and have not done, or do they just speak in generalities about “deals we’ve done in the past?”
It is okay to use someone who has not done everything. If they are willing to chase down answers and perspectives before you pay them a dime, you probably have someone good. Over time, you should cultivate a shortlist of 2-3 close investment banking relationships. Good bankers understand they don’t win them all. At the same time, be respectful of their time.
You should not send an RFP out to the 27 investment banks you found on Google who say they cover your space. You should find other people in the food industry who have done the type of deal you want to do and ask them about the banker they used.
Ideally, you will interview bankers 1-2 years before you use him or her for a raise, and 3-5 years before an exit. Hopefully, they will have been adding value in your earlier raises by coaching you and even introducing you to investors. You won’t get a ton of their time, but they will open their network to you if they are interested in working with you.
When to Hire Them
Raises under $10 million
It is seldom that you should hire a banker for a raise under $10 million. There are times where it makes sense, especially if the banker has access to unique investors like family offices who fit your business (you better be sure they really do, and not just through a database subscription). In general, the best bankers with the broadest reach are too busy on larger deals to work on this, and the smaller bankers are generally the ones who lack industry experience enough to get the larger deals. See the Catch-22? You are usually better off in your own network and with a great attorney.
Raises over $10 million
If you have cultivated your shortlist of bankers, and you want to invest in a relationship, this is a great time to do it. You’ll get to see the banker’s true mode of operating. Plus, these larger raises require a lot more work in terms of convincing someone to invest. Generally, the investors are more sophisticated in ways your attorney cannot help you. They think strategically about valuation, structure, governance, board rights, etc., in commercial, practical ways that only a banker can help you with.
M&A
It is extremely important to plan here. Ideally, you have 3-5 years of relationships under your belt. Maybe you have attended things like the Lincoln Consumer Conference and presented. Maybe you have asked investment bankers to introduce you to strategic buyers at trade shows. You could even strike a referral agreement deal, where they simply provide those intros and you engage them if something happens. This way, you get to try their cooking before you commit to eat it.
If the likely exit is not to strategic buyers, but rather through exit to private equity, your banker should have a thoughtful approach. There are hundreds of private equity firms, and it makes no sense to meet with them all. There are only a few who really know your category, business model, or segment. The banker should be able to narrow down a pretty high-quality subset of 50 or so firms.
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