Thinking Like an M&A Expert: 8 Questions to Ask When Hiring Your Investment Banker

One of the ways in which VCs can help entrepreneurs is by introducing them to the best-fit partners and advisors. That includes investment bankers who can help raise capital (private or IPO) or manage interest from strategic acquirers.

The right banker can make a difference by running a well-organized process, effectively marketing your business, offering thoughtful opinions around valuation and deal terms, negotiating effectively, and doing many other things better than their competition. Just as important as transactional skills and relationships, though, are personal chemistry and cultural fit between you and the banking team.

This is an important decision for a founder or CEO hoping to achieve an optimal outcome. Here are some questions you should be asking as you go out to hire the right team:

1) Why are you interested in my company?

You’ll want to be comfortable that the banker is confident in your business, the value proposition, and his or her ability to effectively market the story. Make them walk through their understanding of the business and their proposed pitch to investors and acquirers.

Additionally, ask for an early opinion around valuation expectations. Your banker should not only understand your company and its potential for achieving a desired outcome, he or she should also really want to win the engagement.

2) How well do you know my market, and what relevant deals have you executed over the last 2-3 years?

No investment bank can cover every market or sector equally well – there is generally some level of specialization or at least comparative strengths. Be sure to fully vet a team’s knowledge of your space. If they’ve been working in the sector recently, they will be more up-to-date on market interest levels and valuations expectations and should have warmer relationships with acquirers and capital providers.

Quiz them around activity in the industry and ask for their opinion on trends. Additionally, try to understand the types of structures they’ve executed and the size of deals they’ve worked on in order to find similarities with your business and situation. 

3) Who are your top 5-10 relationships in my market? Can you discuss your process for developing a buyer list?

Further to the previous question, drill deeper on the bank’s relationships. Which companies do they speak to? How often? With whom at the company do they speak? Have they transacted with these parties before? Are they in discussion with any right now?

Warmer leads and relationships can create quicker outcomes. That being said, they can’t know everyone well, so try to understand how they plan to develop an overall acquirer or capital provider list and walk through their outreach program, value pitch, timeline, etc.

4) Explain your fee structure.

At the end of the day, dollars and cents do matter, and most fees can be negotiated. The majority of banks implement some combination of retainer and success-based fees, with the retainer being a charge for simply working with the bank throughout the duration of the process, and the success-based fees being dependent on execution.

Obviously, it behooves you to weight the structure towards outcome-driven fees, especially if there is a higher risk the deal doesn’t get done. The success fees are usually structured as a % of deal value, and scale downward (as a %) as the size of the deal increases. Above all else, do your research to be sure the fees are inline with market (or better) and align the bank’s incentives with your own.

5) Show me some previously created deal materials.

A good chunk of the banker’s time will be spent creating materials to facilitate the process — management presentations for investors, blind memorandums to elicit initial interest (i.e. “teasers”), fully disclosed information memorandums, etc. — so it’s important to have an idea of quality going into the process.

You’ll want to understand whether the team can be creative in taking what they’ll learn about your business and turning it into a compelling story visually, with clear messaging and minimal mistakes.

6) Who will be on your deal team and what role will they play?

We’ve all heard stories about (or experienced) how thin banking teams can be stretched across multiple deals. Try to get an understanding of which resources will be assigned or dedicated to your process.

Is there a mix of senior and junior bankers who can drive a process with their technical and organizational skills? It’s more important for the senior folks to have the relevant industry experience and contacts, but you’ll want to be sure there are enough junior resources to handle the workload.

There is no rule of thumb, so have the team walk you through who will be doing what and how major milestones will be hit.

7) What differentiates you from other banks in the market?

Here you’re trying to get at “non-transactional” value add. Some banks implement outsourced corporate development models to complement their transactional services — this can be valuable if you need help assessing broad strategic options prior to a process or want to better understand the market’s appetite for acquiring or investing in your company. Or you may value the type of process a bank runs, or their relationships, or simply their culture and personality.

As mentioned, chemistry and trust are very important elements in all of this. Be sure to spend face-to-face time getting to know the banking team to determine if there is a fit.

8) Walk me through some broken deals you’ve experienced.

No bank successfully executes 100% of their engagements. Deals can fall apart for all sorts of reasons, from poor timing or weak market conditions to a lack of readiness on the company’s part or failure to execute to plan. They can also be derailed by process shortcomings such as disorganization, misaligned messaging, poor targeting / outreach tactics, or lack of data / marketing quality.

Try to tease out any common themes among derailed transactions across the bank’s recent history. At the very least it will get them talking about how they managed a process through difficult situations.

Photo by: Ben Rosett