Banking on the right choiceBanking on the right choice

Steve
Rockwell

Entrepreneurs may be contemplating taking advantage of a stronger deal market by evaluating the potential sale of their companies. After the decision to sell has been made, choosing an investment banker to sell the company is perhaps the most important aspect of the process. A good investment banker can add value by attractively positioning the company and identifying multiple potential acquirers to create, in effect, an auction — staging a competition for the purchase of the company that maximizes its price. 


But interviewing bankers can be a trying process. Most are likely to have data supporting the claim that they are the leading firm focusing on restaurants and that they have done more deals than any others. How can one choose from a group of firms, each of which is supposedly the best and most experienced? 


There are several important considerations for the seller.


Commitment to and knowledge of the restaurant industry. Most investment banks, especially the larger ones, view the restaurant industry as a niche, and therefore have limited resources dedicated exclusively to it. Ironically, the fact that it is a small industry is precisely the reason people should be dedicated to it. Knowledge of the key personalities and the hot and emerging concepts can be important in focusing the sale process on the right buyers and accurately positioning the company to maximize value. 


Unfortunately, however, individuals’ responsibilities often are split between restaurants and a similar industry, with the focus changing depending on which is hottest or has the most deal activity at any one time. As a result, a party’s knowledge of the industry may be stale. This could have an impact on how the company is positioned. An understanding of comparable companies and the competitive advantages and disadvantages of the company for sale can have a significant impact on valuation and creating demand from multiple potential buyers.


Knowledge of potential buyers. Every firm will have a “deal list” of all its transactions, supporting the notion that it has relationships with all of the buyers. This list should be evaluated carefully, however. Are there companies of similar size and valuation? Are there any comparably positioned companies — quick service, fast casual, casual dining, franchise, or company operated? There can be different buyers for differently positioned companies, so, for example, a firm with a long deal list of franchised quick-service companies may not be the right match to sell a casual-dining chain that consists of all company-operated restaurants. 


Also, are the buyers on the list skewed toward strategic or financial firms? The potential seller should randomly select a couple of deals and ask the investment banker about them — why the company sold, how it was positioned, the number of bidders and the valuation of the company are only a few of the possible topics to address. The seller also should call several companies on the list, both buyers and sellers, to gauge the performance of the investment bank. Thorough due diligence is justified considering the sale of a company is one of the most important financial events of an entrepreneur’s life.


Level of senior involvement in the process. In many cases, the senior person will be present at the “pitch,” only to fade from the scene once the business is won. While it is not reasonable to expect the most senior member of the team to be involved in every aspect of a smaller transaction, it is important that they lead the positioning of the company and participate in conversations with potential buyers. While a firm’s reputation lends credibility to the sale, the personal relationship between the banker and a potential buyer can directly influence the seriousness with which the buyer evaluates the deal.


Personal relationship between the seller and the key people on the investment banking team. Mutual trust and a high level of integrity must exist on both sides. The two groups will work together closely for several months, and if those qualities are lacking, that time will seem like an eternity.


An additional consideration that could influence the firm’s knowledge of and reputation in the industry is the presence of a research analyst. While the analyst is unlikely to be directly involved in the sale process, his or her knowledge of the industry could prove beneficial to the investment bankers working on the deal. However, while research is very important in an equity offering, it is far less important in a sale of a company.


The sale of a company can be an emotional event for the entrepreneur/founder. Finding the right investment bank to assist in the process can calm some of those emotions and create confidence that the best possible outcome will result.

Steven A. Rockwell has 30 years of experience in the restaurant industry, including as a restaurant analyst, finance executive and investor.