Hiring an investment banker Featured

7:29am EDT October 31, 2003
In today's challenging economic environment, management teams face the competing forces of increasing responsibilities and expectations amid often declining resources of time, personnel and capital.

That is why outside advisers are so important. Along with your attorney and accountant, an investment banker should be part of your inner circle.

Why an investment banker?

Investment bankers provide professional advisory services to companies and the management teams that run them. They help evaluate strategic alternatives, develop sound capital structures, raise debt or equity for operations and growth, and identify targets for acquisition and divisions or assets for divestiture.

Many investment bankers specialize in financial restructuring, helping companies refinance debt, raise additional capital or liquidate assets. Ultimately, they advise on exit or liquidity strategies and develop plans for a company sale, recapitalization or initial public offering.

Like an accountant, attorney or management consultant, an investment banker is a core situational adviser to a company.

When are investment banking services most beneficial?

Hiring outside advisers becomes more important as the complexity of a financial situation or opportunity increases. But when a company faces any significant financial decision, it should consult with an investment banker to gain outside perspective and learn the tricks of the trade to be considered.

Ultimately, hiring an investment banker may not be necessary, but developing a relationship with one who can help managers make more informed choices is prudent.

How are investment bankers compensated?

Most investment banking fees are success-based, meaning the bulk of expenses is contingent upon a successful closing of the transaction, such as capital raise, merger, acquisition or sale. Investment bankers are typically paid a modest retainer upon being hired, and realize 80 percent or more of their fees only when successful in completing the stated objective.

What are the advantages of hiring a professional investment banker?

Hiring an experienced financial adviser significantly increases the likelihood of a superior transaction outcome and allows the management team to focus on core business operations. Consider hiring an investment banker for these reasons:

* Expertise and experience. Running the company is a management team's core competency. You know your customers, your markets, pricing pressures and trends. The core competency of investment bankers is deep and up-to-date knowledge of the capital markets and successful transaction structures. They often have decades of experience negotiating mergers, acquisitions and divestitures between buyers and sellers, and may have completed multiple transactions in your particular industry or region.

* Relationships. Relationships matter in any business, and a good investment banker has them with lenders, equity investors, managers, acquirers and sellers of assets in your industry.

* Efficient outsourcing. A management team can focus on core operations and efficiently outsource transaction management to an expert project manger, the investment banker. Even relatively straightforward refinancings can take weeks of management attention, and a successful acquisition or divestiture can require six months to complete. To help ensure success for the core business and the transaction, leave the financial advisory work to the expert.

* Objectivity and independence. Company leaders must objectively examine their alternatives and may need outside perspective and guidance to identify optimal solutions. Investment bankers bring the voice of experience and help establish realistic valuation and transaction expectations.

* Developing transaction alternatives and structures. An investment banker can draw upon experience to tailor the transaction to fit the company's needs, navigating different market conditions, time constraints, complex covenants, liability or labor issues.

* Optimal outcomes. Good investment bankers create value for their clients. In a company sale or financing transaction, he or she will help identify the full universe of potential acquirers or capital sources, create a professional and competitive process, attract multiple offers and consistently yield a closing price or financing savings incrementally high enough to cover the cost of investment banking fees. Scott H. Lang (slang@bglco.com) is senior managing director and principal of Brown Gibbons Lang & Co. Lang is co-head of the firm and manages its growing Chicago operations, where he plays an active senior role in client engagements and business development. Reach him at (312) 658-1600.