Beware the investment banker when selling your firm

Using an investment banker may be a prudent option when selling your firm, but oftentimes your objectives may be in conflict with your banker’s objectives. Having the right kind of agreement with the banker is crucial.

I’ve personally been involved in several dozen transactions, both as a seller (to private equity and publicly traded companies) as well as a buyer. I’ve experienced firsthand when things go well and when they do not.

Most advisors, when it comes time for succession planning or selling their firm, state they are concerned with a) their clients being well served, b) their staff being taken care of, and c) receiving a fair price for their firm. In other words, clients first, employees second, shareholders last.

Price is obviously a significant factor in choosing the right partner, but for most advisors, particularly those who want to continue working, it should not be the main driver.

A few months ago, I had dinner with an advisor who was in the process of selling her very successful advisory business. She was relatively young (at least when it comes to this industry) and planned on working for at another five years or more. She had a few offers on the table and was contemplating which firm to go with.

As we talked, I shared with her that whether she received $17 million for her firm or $22 million, her lifestyle would not be materially different. Yes, she’d have a few more bucks to pass on to her children when she was gone, but the impact of a few million dollars to her during her lifetime would be minimal.

However, the partner she chose to work with would have a massive impact on her life. Her final chapter in her career could be her most rewarding if she were now part of a great firm, or it could be her most challenging chapter in her career if her new partner became a nightmare.

A major challenge this woman faced was the agreement she had with her investment banker. The fee (commission) to be paid to the banker was highly dependent upon the sales price of the firm.

The agreement wasn’t simply a percentage of the sales price, like one would pay to a real estate agent. In those situations, the agent’s interests tend to be aligned with the seller. After all, most sellers could not care less who lives in their home once they sell. The highest offer typically prevails.

Deals with investment bankers sometimes have accelerators in their agreements. For example, a banker might receive a fee of X if the price is below Y, but might receive a fee of 1.5X or 2X or 3X as the price increases above Y.

This type of arrangement creates a tremendous conflict if your goal is to sell your firm but continue with your employment. The banker’s fee is fully dependent upon price. You care about your future work environment, the treatment of your employees and the service of your clients. Price is important, but may not be the primary driver for you.

We’ve worked with many investment bankers over the years and they can oftentimes bring value, but just like it’s important to manage conflicts of interests with your clients, it’s also important to manage the conflicts that can exist with the firm selling your business.