How to Maximize Results When Working With an Investment Bank

Working with an investment bank can be intimidating, especially if you’re new to the process. Most executives of small- and mid-sized businesses (SMBs) don’t have a ton of experience in capital markets, so it’s important to prepare yourself before you hire a bank to initiate a round of financing or set up an M&A deal.

Here are five tips to help you maximize your deal results when working with an investment bank:

Network with Bankers; Be Reciprocal

Doing good business is a social process. Understand that investment banks are full of complex, successful people who appreciate a good interpersonal relationship as much as anyone else. Bankers will work with just about anyone if the money’s right, but they’d much rather work with people they like.

Many companies and CEOs aren’t properly equipped to pick a great investment bank or negotiate the right deal. There are several reasons for this, including insufficient resources to find a qualified advisor or simply evaluating too few options in their immediate network. (Check out previous articles on ways to meet quality investment bankers.)

Even if you aren’t ready to deal yet, expand your referral base and build relationships in the IB and PE worlds. Help introduce potential future partners to others in your industry to build their knowledge and confidence in your business model. To pick a simpler motto: be human, and be helpful.

Pick the Right Time to Sell/Finance

Regardless of the market, investment bankers or M&A advisors may try to convince you that “now” is a great time to sell, or that the markets are ripe for a debt or equity round of financing.

But CEOs have to take their own fundamentals into consideration and manage their own expectations. This isn’t always easy (looking in the mirror rarely ever is), so there is a role for investment banks to play in helping you uncover value or notice a wart or two in your business. In general, there are some simple-but-easy-to-overlook variables at play: you want to pick a time when your business has momentum and is considered innovative; you want leadership at key positions; and, perhaps most importantly, you’re mentally ready to work the process or divest.

Favor Boutique Banks That Specialize in What You Need

The only reason you should hire an investment bank to help sell or raise capital — not exactly a free service — is because you expect to make more money than the consultant will charge. For small- and mid-sized companies, the best banks will usually be boutiques that have recent (and successful) experience in a specific industry.

Smaller companies need to avoid the big bulge brackets in most cases. Goldman Sachs and Morgan Stanley carry huge name recognition, but no SMB CEO is going to grab the attention of senior staff at a major IB; they want multi-billion dollar acquisitions and IPOs, which means you don’t want them either. Be careful, though, because experience among investment bankers is much more varied at the boutique level — hence the importance of networking. Also, not all banks are equally effective at underwriting or regulatory control, so factor that in.

Understand Investment Banking Fee Structures

Investment banks don’t come cheap. Most deals are negotiated with business owners and CEOs — lending credence to tips #1 and #5 — so you should appreciate the fee structures available to you. If the deal isn’t structured properly then the IB may be incentivized to close quickly and for less value; at the same time, better firms tend to lean on retainers. For a quick lesson, read this breakdown of investment banking fee structures.

Know the Industry: Terminology and Trends

Economists have a concept called “asymmetric information” to describe unequal knowledge between buyers and sellers in a deal. George Akerlof won a Nobel Prize for his 1970 paper entitled “The Market for Lemons,” in which he expressed concern about car buyers’ lack of knowledge about the product they were buying; in effect, it’s easier to take advantage of an ignorant trading partner. You don’t want to be the one buying the Lemon.

Terms fly thick and fast in the capital markets. Know what your banking cohorts mean when they say “multiple” or “buyout” or “due diligence.” If you’re looking for a strategic acquisition, make sure to read about trends with buyers in private sales in your industry. Know ahead of time if you’re dealing with a product group, which might include bankers who specialize in leveraged finance, or an industry group, such as healthcare or telecommunications. Good information and good people are the key to good deals.