Should I Hire an Investment Banker?

There is an entire universe of advisors who specialize in helping entrepreneurs sell their businesses and raise capital. These advisors typically fall into three categories: Investment Bankers, Business Brokers, and Consultants.

411 on Investment Bankers

A good investment banker will help you manage the entire sell-side or capital raise process. They take over a lot of the heavy lifting and help ensure you get the best valuation for your business. Here are a few of the specific tasks investment banks help with.

  • They help you craft your strategy
  • They create marketing materials for you
  • They introduce you to the right investors
  • They field initial investor questions
  • They organize and assist you during investor meetings
  • They manage the diligence process
  • They help negotiate your deal

With all that support, why wouldn’t you hire an investment bank to help you through a capital raise?

First, to offer the high-touch service, quality investment bankers are expensive. You can pay anywhere from 1-8% of your deal in deal fees to the investment banker in addition to a monthly retainer in the tens of thousands.

Second, a good investment banker might not be willing to take you on as a client. Here are a few reasons why:

You’re too small, or your transaction interests won’t generate enough fees.

Like any service-based business, investment banks are limited by the number of resources they have. Each investment bank seeks to optimize the return on their staff’s time while ensuring they provide quality service to their clients.

Given the level of support investment banks provide, it takes just as much time to do a small deal as it does to do a larger deal (if not more). Therefore, these firms often have minimum fee requirements and deal sizes.

Your deal is too risky.

Investment banks live off of successfully completed deals. Investment banks make the bulk of their income when a successful capital raise takes place. If they take on a company that isn’t as attractive to buyers, there is a higher likelihood the deal will fail, and they will waste resources that could have been spent on another project. Further, each failed deal will reflect negatively on their abilities as investment bankers when seeking to gain new clients.

If your business is under $10M in revenue or $1-2M in EBITDA, you are usually too small for most investment banks to take on as a client. Also, if you’re raising a small amount of capital, (<$20M) your transaction interests are typically too small for an investment bank.  There are a few exceptions, like if you’re growing incredibly fast and have visibility into being a much bigger business.

The 411 on business brokers and consultants

Business brokers tend to play under the investment banker minimum. They typically focus exclusively on selling businesses vs. capital raises and tend to spend less time with each client. The quality of advice and service you get from a business broker varies greatly broker to broker. Many brokers will do nothing more than create a bullet point summary of your business and send it to every person in their network. Others do a better job supporting you throughout the process. Business brokers make most of their income by charging a percentage of the completed transaction.

Consultants are usually paid on a flat fee or retainer basis to help with particular aspects of a capital raise. Like brokers, the level of service you get varies greatly.  Our Capital Studio functions as a consultant and you can learn more about our offering here.

Do I need an Advisor?

Given the complexity of the capital raise process, everyone should have at least one outside advisor that they trust to help them navigate a capital raise process. Whether this is a professional advisor or an unpaid advisor, you should enlist the help of someone who understands your business and the capital raising process.

Here’s Our Typical Recommendation to Business Owners

Go with an investment banker if:

  • You want to sell your business and fall within the sweet spot for an investment bank (>$10M in revenue or $2M in EBITDA)
  • You want to sell a piece of your business and raise a meaningful amount (>$20M) of growth capital

Go with a quality business broker who will run a targeted process if:

  • You’re ready to sell now, you’re under the sweet spot for investment banks, you don’t have access to the logical buyers, and don’t have the time to do the research

Find a consultant who specializes in the type of transaction you want to pursue if:

  • You need help with your capital raise strategy, you aren’t sure if your business is optimally positioned, or you don’t know who the right investors are.

Go at it alone if:

  • You have a solid capital strategy, already know all the logical buyers or investors for your business, don’t need any help pitching your business
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