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Investment Bankers: A User’s Guide for CEOs

Working with investment banker to build value for company.
© AdobeStock
You may not be ready to sell yet, but getting advice now could mean increasing the value of your company for when it is ultimately time to do the deal.

As a chief executive, you have no shortage of lawyers, accountants and other internal and external professionals to help guide your daily and long-term decisions. Yet you may be overlooking a resource you probably think of only in conjunction with a sale: an investment banker.

While they will likely be an essential part of arranging a deal when that time comes, investment bankers can provide valuable information right now to help you identify and correct problems, spot industry trends ahead of the competition, and create a stronger company.

That’s because investment bankers live and breathe valuation–an area that too many CEOs overlook. Investment bankers are adept at quickly and efficiently sizing up companies, understanding where they fit in the competitive landscape, and helping them build value. And for the minimal time investment of starting a conversation, you may find bankers happy to share information long before you’ve established a formal relationship.

Here are four ways they can help you:

1. Gain an objective assessment of your business.

An investment banker’s neutral, unbiased assessment can feed directly into a long-term strategy that minimizes sentimentality and emphasizes areas ripe for growth. For example, they might recommend winding down an underperforming business in order to remove problems that are distracting the management team or finding a growth equity investor to provide additional capital. These arrangements come in different shapes and sizes and an investment banker could help you weigh the pros and cons of each, depending on your situation.

2. Think like a buyer.

Your intimate knowledge of the business you run is your greatest asset. But it can also be a liability by obscuring risks and defects that might be readily apparent to anyone considering buying the company.

Investment bankers are trained to think precisely as a buyer would. It’s in their DNA to quickly size up what companies’ strengths and weaknesses are by objectively comparing a business to its competition to determine how it stacks up. It’s wonderful to hear what you do well, but it is even more important to know where you are underperforming and could do better.

Maybe your staffing is lean, and you pride yourself on being frugal. That can come back to bite you if buyers decide you really need a CFO in place of your controller and an HR professional to bolster your staff. Buyers will probably add the cost of these upgrades to your expense profile, which will reduce your EBITDA. You are better off making these fixes years before you sell, so don’t wait.  Having a more professional management team will add value to your company immediately.

Buyers will want your contracts with clients to be longer term so that there is more continuity to your revenue. If all of your contracts are one year, that might be considered a risk that would cause buyers to lower your valuation. Making extended contracts a priority could strengthen your business right now, even as it makes you a more attractive seller in the years to come.

Some CEOs may even grow impervious to headquarters badly in need of an overhaul. We worked with one who resisted even modest investments in internal and external spruce ups. He viewed the splotched walls, mismatched furniture, and weeds growing through cracks in the parking as signs of thrift—’We’re pouring all of our money into serving our clients.’ But experience told us that buyers wouldn’t get that message. Rather, they’d see it as a warning of possible neglect elsewhere in the organization. Finally, he agreed to spend $50,000 on improvements, and they were instrumental in driving a $50 million sale.

3. Determine what each part of your business is worth.

We believe a comprehensive valuation is the best way to uncover detailed, actionable insights about your business, which is why we recommend companies undergo them at least once a year. Our book, QuickValue, provides an intensive but straightforward process by which companies, working internally, can investigate their essential value drivers—the qualities that make them unique—in order to understand what they’re worth.

Yet even before you undergo that formal process, an investment banker may be willing to provide you with an informal, “back-of-the-envelope” valuation. We do that kind of work as a way of establishing a long-term relationship with companies. CEOs often find this information eye opening.

One who we worked with recently was surprised to learn that while his business overall was valued at 8 times EBITDA, a single part of the business was valued at 15x EBITDA. This revelation made it easy for the CEO to redirect resources from the lower valued businesses to the more highly valued one.

We’ve seen it over and over again: companies pouring resources into areas of their businesses that are underperforming or whose value, ultimately, may prove to be far less valuable than other parts of the business. By overlooking the importance of timely valuations, your competitors may fall into that trap. But you don’t have to.

4. Gather industry intelligence.

Experienced investment bankers will have accurate and continually updated information on revenue and EBITDA multiples for your industry and how those have changed over time. They’ll know how many deals have occurred in your industry and how that compares with previous years. They can also identify the best buyers for companies like yours, whether larger firms within your industry, outside companies looking for a foothold, or private equity investors.

Of course, this information will be essential when the time comes to put the company up for sale. But don’t wait until then. What you learn could help you make key strategic decisions to grow. Keep in mind that investment bankers are constantly talking with other companies, including your competitors. While they won’t divulge privileged details about those companies, they can share insights about which businesses in your industry are performing well and where the growth opportunities are.

And their knowledge of the industries they cover can give you useful operational benchmarks against which to measure (and tweak) your own performance. For example, if your general and administrative expenses amount to 15% of revenue while the industry averages 10% or if your cost of sales is 30% and the industry average is 20%, that’s a clear roadmap for where you can get better.

If you wait to get advice from investment bankers until you are ready to sell, it could be too late to put into practice some of their ideas for increasing the value of your company. In many cases they will be happy to share their thoughts, in order to build a relationship with a chief executive. Indeed, information that could help you avoid pitfalls and build new value is readily available. All you need to do is ask.


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