For most owners, preparing to sell the family-owned company is the single most important undertaking of their professional lives. The business is the economic engine that has sustained the family for decades, or maybe even for generations. Many families have a very significant portion of their wealth concentrated in the business, and therefore, in largely illiquid form. Of equal or greater importance to the economic considerations, often the family firm has served as the social and cultural anchor for the extended family.

These factors can conspire to make the decision to sell much more than an exercise in cold, objective business rationality. It is, and should be, a highly personal and emotional experience — and that is precisely what makes the role of advisors so critical to achieving a successful outcome. Given the mix of emotions swirling around in the minds of family members, objective advisors are there to provide stability and rationality along the way.

In choosing the advisors who will be your advocates during this important process, it is critical to keep in mind that they have their own biases. As transaction professionals whose compensation hinges on closing successful transactions, investment bankers bring an inherently pro-transaction perspective into the mix. The problem is, depending on the circumstances, the best transaction might be no transaction at all. Despite a decidedly pro-deal bias, investment bankers can add invaluably to the sale process.  The keys are knowing when and under what circumstances to engage a banker and how much weight to give their advice in the overall mix of views you will receive.

Here are three scenarios where it is appropriate to consider hiring an investment banker:

  1.  When it's a "seller's market" – Markets go in cycles and investors often exhibit a herd mentality insofar as any particular industry or sector is deemed to be in or out of favor. In a given industry, a seller's market occurs at a point in the cycle when the number of available companies for sale is fewer than the number of buyers seeking to acquire those companies. Along with this imbalance, there are certain other telltale signs that indicate when a particular sector is heating up. Increased press coverage of large investment or financing transactions, increased IPO activity, a larger than normal volume of market entrants into the business and increased lending activity in the industry and in adjacent sectors all are hallmarks of a frothy market. In this environment, it is wise to consider engaging an experienced investment banker that can leverage buyer demand into a bidding war for your company. A carefully managed "process," as the bankers like to refer to these auction dynamics, will almost always result in a higher price under these conditions than proprietary one-to-one negotiations undertaken directly by the seller.
  2. When the company has had a sustained period of steadily increasing financial performance – Investors pursue growth because it enables the value of an investment to increase over time and because it is often an indicator of an expanding industry where a "rising tide is lifting all boats." Revenue growth is always an essential metric. Depending on the sector, growth in profits (or more particularly EBITDA growth) may or may not be a prerequisite to attract buy-side interest. If your company is in the enviable position of having dramatic revenue growth and profit growth, you have probably received unsolicited acquisition interest from larger companies, private equity firms or other investors. It is a natural reaction for many entrepreneurs who find themselves in this position to believe that they are perfectly capable of navigating the negotiations on their own. After all, they built the company and achieved the results that have culminated in this happy circumstance. But this is precisely the situation in which the prudent owner needs to step back, because for all his virtues and business knowledge, he is usually treading on unfamiliar territory when it comes to selling the company. To paraphrase a famous quote "there are known knowns, there are known unknowns and there unknown unknowns." If you've never sold a company before, you'd be wise to surround yourself with experienced professionals who have done so. The right banker will know the markets in which your business operates, what the buyers are looking for and how to position the company's story within the overall context of the industry and the buyer's business strategy.
  3. When there is a substantial disparity in size or sophistication favoring the buyer – In the vast majority of M&A transactions involving privately held target companies, the buyer and seller are in asymmetrical positions that favor the former over the latter. Why? Because the buyer is usually larger than the seller, the buyer has engaged in more transactions than the seller and the buyer has long-standing relationships with a cadre of professional advisors with whom it has completed transactions in the past. Active corporate buyers might look at dozens of companies before making one acquisition. In the process, they acquire a lot of domain knowledge about industry sectors and niches and the relative valuations of companies within those sectors. Conversely, smaller, closely held sellers seldom have the time or resources to undertake a comprehensive strategic survey of their own industry and are therefore more likely to rely on anecdotal information rather than hard data. Moreover, process dynamics usually favor buyers for a multitude of reasons. Among these are deeper management ranks and efficiencies gained from working on prior deals with its outside advisors. Even in the context where a selling company is fortunate to experience the scenarios identified in #1 and #2 above, these asymmetries can overpower most sellers at the bargaining table. The right investment banking firm can counteract some of the buyer's leverage and level the bargaining table.

In the next post, I will provide some tips on how to interview investment banking firms to determine the best fit for your company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.