Pay Up for Fave Bank or Cut Costs
So I posted this in the IB forum, but in case some PE guys don't check the IB forum, reposting here:
So, here is the situation. I am selling a company, and just met with ~5-6 banks. The bottom 2 are absolutely shit and are gone. 1 is alright, but I don't like the senior bankers. So, there are 3 left. Within these 3, the proposed fee structures vary, and the difference between top and bottom could be say ~20-30% on absolute deal fee amount. They all have some sort of tiered structure. Valuation ranges proposed were all ballpark. We know what min price we should fetch.
I also know who the realistic buyers are (say top 5-7 names). And, technically, I don't need to rely on the best of the 3 to reach out to them, because at least two thirds of these top names will give us offers. To give some context, the best of the 3 is not a GS/MS, but does probably know the top buyers better than the other advisors. Here are my questions:
- If you are quite certain that the top 5 names will give you decent bids, would you save on fees and go with a cheaper advisor?
- Do you think the top advisor representing the asset, would lead to a potentially higher price?
- If you personally do like the top advisor more, but economically, it's more expensive. What would you do?
- On one of the top 3 names, the top 2 advisors have highly conflicting comments on how they would structure a deal. One says super clean, and one says highly structured. What to make of it? (It's possible that this buyer has done one deal that was super clean, and then another one that was highly structured. Fair to say I guess I won't find out?)
Very curious what the senior PE/IB members on this website think. (Junior IB guys, I beg you not to chime in.)
There isn't a wrong answer here.
My decision would be oriented around what non-financial or non-immediate outcomes can I generate with this advisor selection.
- Does a specific person at one of these banks have a particular relationship with another person or firm that I want connectivity to? Feeding them this fee today is the most straightforward and acceptable way to generate the goodwill that pays off with that thing you want later.
- Does the guy at one bank sit on a philanthropic or social board or committee for something I'm interested in?
- Is one of these advisors absolutely great at sell-side work in our sector because they have wonderful connectivity and reputation in the strategic universe? Giving them this mandate means I am someone they will be able to speak knowledgeably about and make the beneficiary of the soft steering some clients need to make a decision.
Basically, you get the chance to be long-term greedy to both your individual and your firm's benefit. Use that wisely.
You've nailed it already. Both of them are likely speaking truthfully from experience. I would try to dig into that to see if the contradiction can be explained by different partners at that firm having different approaches.
Last year I ran into this. I wanted to bring new money into a booming fintech business (I know, cliche 2021). I got in process with (among others) the single perfect growth equity fund (smart, fast, pays up, does the right diligence, massive fund size). After a few really promising meetings that happened fast, they froze me out for a couple days and I had to backchannel with the person who introduced me. They ended up saying no because they were halfway conflicted. A business they had partially exited (IPO but they still held shares) is in the same category and they flat-out said mine winning would come at the expense of theirs.
Well, this month I refreshed on the names I consider actual competitors and found that one raised in March from that same sponsor, so how the fuck? Website shows that none of the people I spoke to (the sector team) were on that deal, it was someone else who I never met, is a generalist, and clearly senior enough to have some autonomy.
I share this to say that these two banks possibly had wildly divergent experiences because they interacted with two different partners.
I have learned that life isn't long enough to tolerate working with people you don't like. I like paying for quality. I didn't negotiate buying my last car. Of the three HVAC guys I had come price the job at my house, I mentally picked one before even getting his quote (he ended up being 30% higher than the others) because I trusted him the most. The electrician installing a chandelier in my condo next month is 10% higher than anyone else and naked about that. He says he tells people upfront to see if they blink because he hates the headache of dealing with cheap clients.
You might be different and that's fine. If I like the person, I want to work with them period.
You said that they know the top buyers better. That's invariably advantageous as long as the buyers know them to be trustworthy. I would channel-check this. Do sponsors respect these guys? You know how this works. Some guys spin bullshit with addbacks and gimmicks in process. Others are center-of-the-fairway people who maximize value without any need to lie. If your advisor is not just well-known but well-regarded, yes that gives buyers confidence to bid.
Good luck. I'm interested to see what other responses you get. The senior ranks here are thin. CompBanker?
Helpful color. Thanks!
I just wanna say I appreciate when people like you respond with such nuanced comments. I’ve learned a lot about a lot from reading comments on here, and I’d argue that my new job was secured partially from reading stuff on this site. Thanks and hope you have a great weekend
+1, APAE gives some of the most consistently good advice on WSO. I usually pause my music to read through his comments, because they are nuanced and well articulated. I have learned an insane amount about the more technical aspects of buyouts, and you get a senior level POV which is pretty rare to get for free. Honestly its helpful to get from a junior perspective because you can build that knowledge into your own future deal structure scenarios and already have one level-headed approach to reference.
APAE If you are ever hiring let a brother know :)
I hate when APAE tags me after a really long post because usually I have nothing else to add — he and I often think alike and he is very comprehensive. So I’ll make an attempt here but good advice from APAE above.
1 - It seems you don’t really know what you’re trying to get out of an advisor. Do you want someone who will just execute a sale process? Do you want someone that will be able to introduce new buyers into the process? Do you want someone that will get along well with management and smooth any potential people challenges? You need to determine why you’re hiring the advisor so you can then determine if the incremental price is worth it for the more expensive advisor.
2 - Which advisor is running the process definitely sends a signal to the buyer about how competitive the process is. I would routinely see PE firms bid lower because they assumed an asset wasn’t broadly marketed due to the advisor being essentially unknown. So keep that in mind when selecting an advisor. It isn’t fair to the little guys, but it is absolutely a behavioral pattern I have observed. In terms of the top advisor leading to a potentially higher price … i do think the achievable price is influenced by the quality of the advisor, namely in their ability to run an effective process and effectively position the asset.
3 - To answer your core question (#3): The incremental price I’d be willing to pay for the top advisor really depends on how much $$$ we are talking about here compared to the incremental value-add of the advisor. That said, I’ve had some really good experiences with advisors and some really bad experiences with advisors, which has biased me towards ensuring I have the right people more than the price being the best.
4 - In terms of who is ‘right’ — nobody knows. Buyer behavior is finicky and just because something worked one way in the past doesn’t mean it will work again in the future. This may sound obvious, but I think people in M&A tend to assume a degree in stability over strategy/behavior/decision making that just doesn’t exist. A prospective buyer may be really hot for one segment for months, pursue a bunch of assets unsuccessfully, and then a piece of news comes out that makes them lose interest in the sector altogether. Even little things like: “This buyer is not very responsive” can easily be the result of the advisor doing one deal with a buyer and that buyer happened to have its senior team members on vacation during a critical two weeks within the deal. For some reason people in this industry love to take a single data point and claim it is trend. So when it comes to whether the particularly buyer will do a deal that is ‘highly structured’ or ‘super clean’ … nobody knows and both could be right, but you won’t know until the process is over.
Hope this helps.
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