Five Reasons an Investment Banker Pays for Itself

150 150 Brian Lauzon

A friend of mine who is a financial advisor tells each of her prospects, “I hope you select me as your advisor. But if we are not a fit, please find an advisor with whom you are comfortable.  And if you need help finding one, I can give you some names.”

She is a great example of someone who believes in herself but, equally importantly, she believes in her profession.

We echo this sentiment at the end of each conversation we have with an advisory firm that is considering hiring an investment banker.

I mention this because we believe strongly that a credible, experienced investment banker (InCap or another experienced investment banking firm that targets the RIA industry) will improve client outcomes in ways that far exceed the fees that they charge.

Below are five reasons why we, too, believe in our profession.

Most business owners only sell once.

For most business owners, selling their firm is a once-in-a-career event.  The sale represents the culmination of years of sacrifice and effort. The firm and its future are their legacy.  As such, transitioning to new ownership needs to be done with a high degree of precision and professional skill.  And, unfortunately, there are no do-overs.

This is analogous to the financial planning work done by RIAs. While this process is rooted in scenario analysis, your client only gets to live one life. So, getting the plan right is of paramount importance.

Financial planning clients rely on you to design their course of action because you have done hundreds of financial plans. You know the landscape, the pitfalls, and the emotional roller coaster that financial markets can cause.

Just as you serve as a coach to your clients in order that they obtain superior outcomes, “going it alone” in the sale of a business can lead to missed opportunities and unforced errors in a process where there are no do-overs.

Fair market value requires a “market.”

As an industry that puts client interests first, it is not uncommon for an RIA owner to say to us, “I just want what’s best for my clients and a fair market value for my firm.”

But “market” pricing relies on the presence of a market. A credible investment bank creates that market for your firm (an otherwise illiquid asset with no “market” to speak of.)

After gaining a thorough understanding of your firm and your objectives, a good banker will formulate a broad list of potential suitors (as many as 50-60). This list is built with an informed view of your strategic interests, as well as those of potential buyers.   

However, acquirers’ interests are fluid and can change in ways that are not apparent to an outside observer.  Maybe their pipeline is full.  Perhaps their current geographic priorities are focused elsewhere.  There are a host of reasons why any one buyer would have either outsized or limited interest in a seller’s firm. By casting a wide net, sellers diversify away this risk which, if ignored, will impact the terms they receive.

Running a process like this is a lot of work. Many M&A consultants may have a broad list, but they often steer clients towards a small cadre of favored firms with which the M&A consultant has preferred relationships.  We do not do that.  We help you to find the buyer that is best for you, even if that buyer is not especially well known. 

In negotiations, parity is everything.

As any student of negotiations knows, an even playing field leads to mutually fulfilling results and successful deals.

In most instances, an acquirer comes to the negotiation table with a significant information and experience advantage (frequently to an overwhelming degree.) Many serial RIA acquirers approach negotiations with sincerity and a genuine “win-win” mentality, but the cards are stacked in their favor and they have a fiduciary duty to their company, to their capital partners and to their other shareholders to do what is in their best interests, not to do what is in the seller’s best interests

With an experienced investment banker looking out for your best interests, this experience gap evaporates, creating an even playing field that vastly improves your outcome – not just with respect to price, but also with respect to deal terms, employment arrangements and outcomes for your employees.   

Momentum is your friend.

M&A is a process. It has a beginning, a middle and an end, invariably with  twists and turns along the way.

Managing this process adeptly is among the most important functions that a skilled and experienced investment banker performs for you. Time and again, we have seen well-intentioned RIA owners attempt to orchestrate negotiations with hand-picked suitors on their own. In some instances, this can result in a deal being struck, but usually it does not.  Furthermore, as with equity investing, unless there is a deliberate process behind a decision to buy a stock, a positive outcome is more a function of luck than anything else.  Your business is too important to leave to chance.

Deals have a life of their own and choreographing them is a learned skill. Maintaining forward momentum in the M&A process keeps the process alive. Fits and starts can be harmful to your firm and staff. Prolongated processes result in “deal fatigue” where parties either walk away or, worse, agree to less-than-optimal terms.

A seasoned investment banker maintains deal momentum and vastly improves the probability of a deal closing (and of that deal being the “right” deal).

Emotions can cloud our thinking.

Is asset allocation learnable by the non-financial professional?  Could an appropriate, diversified portfolio be constructed by an amateur with a basic understanding of capital markets?

The answer is yes, now more than ever.

Then why is the financial advice industry among the fastest growing sectors of our economy?  Because advisors have successfully (and aptly) shown the investing public that “going it alone” is fraught with risk.

The raw materials of your trade have never been more accessible to investors. But you (and your clients) realize that financial markets have a funny way of causing market participants to make poor decisions. You serve as an anchor to windward when the waters get choppy.

Like financial markets, the inevitable twists and turns of the M&A process can evoke strong emotions among the participants. When this happens, an experienced investment banker will be your anchor, supporting sound decision making and helping you remain grounded in seeking your ultimate objectives throughout the process.

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We would not provide investment banking services if we couldn’t point to measurable benefits that come from our work. Like you, helping our clients is the reason we go to work every day.