InSight

Exit and Growth Strategies for Middle Market Businesses

Does Industry Expertise Matter When Selecting an Investment Banker?

By Jeff Wright | Mar 04, 2015

Investment BankerSometimes a company owner insists that an investment banker must be an “industry expert” to maximize value. To the contrary, my experience leads me to believe that the real benefits of specific category experience may be small and the potential pitfalls, larger.

It may seem counterintuitive, but being narrowly focused in an industry may actually be a detriment to owners seeking to sell their companies for maximum value. Here are some reasons this might be so:

  1. An “industry expert” may approach the assignment just like his last deal and not apply innovative thinking to the assignment. There is a risk of “phoning in the work”. We know that every company and every situation is different and deserves fresh thinking.
  2. The “industry expert” may see a limited buyer universe because he thinks he already knows all the buyers in the industry. This kind of banker may not dig as deep or think as creatively to find buyers who may have strategic adjacencies, because they are not directly in the client’s industry.
  3. Worse, due to long standing relationships, the banker may owe favors to certain buyers in that industry and lose some objectivity, maybe even unintentionally.

The Minneapolis CFA office looks for Managing Directors who bring a wealth of diverse business and life experience to the firm. This broad-based background and the hands-on experience of closing deals in dozens of different industries can be a real benefit to the seller.

  1. A good banker brings fresh, objective thinking to every assignment. Opportunities to “cross pollenate” knowledge from other industries may be quite beneficial, as any one industry can get quite insular.
  2. Maximum value in a sale comes from expanding the potential buyer universe to categories that might seem further afield from the owner but may have underlying synergies that support a higher price than “look-alike” companies.

As an example, we sold a company in 2013 that provided SaaS internet security services. When searching for an investment banking partner the owner started out interviewing only investment banks with high-tech experience. When the seller final met us he was impressed with the breadth of our experience and our willingness to tell him things industry insiders didn’t want to tell him. Ultimately he hired us because he liked our methodology and he trusted us. We built a custom strategic buyer list of 350 companies, delivered 12 solid bids and sold his firm to a company doing business in a different industry sector for a 14X EBITDA multiple – significantly higher than this owner’s ambitious goal. Our client and we both believe that we outperformed the industry insiders.

The lesson is that sellers should be cautious about putting too much weight on industry expertise when selecting the right banker for their assignment, and instead be open to a more well-rounded M&A advisor.

Posted by Jeff Wright.

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One Response to “Does Industry Expertise Matter When Selecting an Investment Banker?”

  1. Even more important is the deal experience of the banker who is asking to lead your deal.

    The key question is “how many deals has the lead banker completed (not worked on but actually completed) personally in the past 5 years?”.

    Press hard on this question because most of the answers we got were just spin. Our rule is if the lead banker hasn’t completed (closed) at least 10 deals themself in the past 5 years. Move on and find someone who has.

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