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 (email@example.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.
Creating the balance needed for change
By Tony Lang
The only constant in running a business is change. While we can't control change itself, we can control our responses to it.
One way to be ready for whatever might come your way is to make sure your business has the necessary balance to ride out the waves of uncertainty. But what is this balance, and how do you achieve it?
In my experience, there are two critical components for achieving a balanced business: the art and the science.
The art of business is the ability to perceive the big picture, the thrust of your creative energies.
The science of business, on the other hand, is constituted by the parts and pieces-the daily operations and the ability to make things happen. Businesses need both these components because without vision we don't know where we're going, and without processes we won't get there even if we do know.
For an example of how these apparently different skill sets fit together, consider a profit-enhancement model:
- You identify a management team that shares responsibility for profitability throughout your organization.
- You get key decision-makers to learn to identify business strategies that increase productivity and sales.
- You train key decision-makers to implement these strategies.
- You identify specific financial goals that will enhance profitability.
- You implement a system of accountability and responsibility that makes positive financial results happen.
- Finally, you share the rewards with the team.
If you have done the process right, one outcome should be a management team that has a deep sense of commitment to improved financial performance.
Another outcome is the idea that profit is an attitude. An attitude that will, if encouraged, permeate your company from the owner to the receptionist.
But a profit attitude is much more than cutting costs, increasing sales or tightening financial controls. It's about empowerment, encouraging everyone to think, to initiate, to be innovative and to be committed.
This reflects the best kind of science/art equation-offering a flexible structure in which businesses can factor in their own specific needs, finding their own unique balance for success.
There is a vision at work here, one that has room for specific, practical processes to reach organizational goals. In fact, it's the best kind of vision because it's grounded to the reality of results-oriented applications even as it's being driven by the values of your entire team.
The result is balance and stability, even in the face of change.
Tony Lang is a partner at Hausser+Taylor LLP, a Cleveland-based regional accounting and consulting firm.
However, the most challenging and often most rewarding options can result in environmental shock to the company through the gain or loss of employees, processes and culture. These results are the after-effects of the most common growth alternatives, including the acquisition of a new business or the divestiture of an existing product line or business unit.
Although the sale of a business may seem counter-intuitive to growth, many examples are evident within the middle-market. The divested business could generate stronger growth with a more synergistic parent or with a financial partner that has greater access to capital to pursue growth.
In addition, the parent company of a divested business could use the proceeds from the sale to re-invest and grow more core operations.
Over the past few years, economic weakness, combined with less aggressive capital markets, led to a significant decline in mergers and acquisitions activity. In 2002, total M&A volume included 5,666 transactions, a decline of 14 percent (920 transactions) over the 2001 period. However, when compared to 2000, the decline was a robust 37 percent (3,346 transactions).
Many of the transactions completed over the past few years (approximately 17 percent) in 2002 included bankrupt businesses. In an environment of weak operating performance, coupled with limited access to capital, buyers of businesses maintain substantial financial and negotiating leverage in transactions -- a buyer's market.
If a company has the financial and human resources to pursue acquisitions, the current market environment is very conducive for acquisitive growth.
The domestic economy has started to improve. Many larger, public companies are reporting stronger earnings, and anecdotal evidence suggests that middle-market companies are also generating stronger operating performance. With the economy on the rebound, the financial markets also have gained momentum, pushing valuations to higher levels.
In order to continue to generate earnings growth and sustain higher valuations, many companies pursue acquisitions ranging from entire companies to certain niche product lines.
In addition to the equity markets, the lending environment also has improved. Banks are more willing to provide capital for M&A transactions.
Also, private equity firms remain awash in capital -- more than $175 billion in the past five years (from more than 1,000 firms) remains available for investment, either for add-on acquisitions for existing portfolio companies or to partner with management and recapitalize a business.
Transaction volume with private equity firms, as measured by dollars invested, actually increased, from $9 billion in the first half of 2002 to $33 billion in the first half of 2003, and we expect this recovery to be sustainable.
Overall, the strength in the capital markets, combined with improving operating performance for many businesses, has led to stronger M&A transaction activity -- a seller's market.
The current market conditions for middle-market businesses are unique -- both buyers and sellers can excel. Businesses with solid management teams, defensible market positions and productive operations are highly sought-after by buyers in today's market. As a result, sellers of these businesses garner strong valuations in the sale.
In addition, many companies continue to divest noncore assets, and in many instances, these are operationally or financially distressed opportunities that buyers can acquire at relatively low valuations. Management teams must be intelligently opportunistic in exploring either an acquisition or sale, but current market conditions will reward both alternatives.
Scott H. Lang (firstname.lastname@example.org)is Senior Managing Director & 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.