Lessons for Adversity
10. If you’ve decided that you’ve had enough at this point, understand the role of an investment banker.
There will be times when we have just had enough; we’ve done everything and it’s not working out. Or maybe it’s worked out and you’ve turned the corner again, but you’re done. You’re finished with the family business, with the industry, with waking up every day fighting for a dollar. If so, this is the point where you want to hire an investment banker. Investment banker is a strange and misleading title to most people who have never worked with one. They neither “invest” nor “bank.” What do they do? They are sales agents for money or companies. They help sell, buy, or borrow money or companies. That being said, a great investment banker, like any great salesperson, can help you maximize the value of a sale of assets or the entire business. If they are great, then they are creative, have a lot of contacts, and move quickly. The problem is that many are not great. Many understand finance, and many are good at selling, but they generally chase too many deals and pass on projects to junior staff. Why? Regardless of the outcome, they get paid on a percentage of the sale (or loan, or investment). They obviously want to sell your company for the highest value because they will make more money. However, in a distressed situation, there’s only so much effort they will put into the sale. You, as the industry expert, will have to work hard to help them understand the true value of the entire stakeholder chain (from suppliers to employees). There will be a tendency to focus only on cash flow and profits. If your company is distressed, those numbers won’t add up to much. You will have to demonstrate value in the assets or a potential turnaround plan.
Also, there is a practice of trying to improve EBITDA (earnings before interest, tax, depreciation, and amortization) by showing Adjusted EBITDA numbers. Sometimes this is practical and useful. However, sometimes it’s just fiction. Essentially, the investment banker puts together financial projections that include a lot of “if” statements. “If we cut overhead by 10%...” or “If we cut shipping time by 5%...” or “If we improve sales by 15%, the adjusted EBITDA will be $xxx,xxx.” In other words, they’re trying to sell a fixer-upper for a move-in ready price. This is okay; just be reasonable. You will turn away more potential buyers by trying to sell too much smoke than you would if you were honest and reasonable.
Task: Start interviewing investment bankers. Ask them for their experience in the industry, and samples of the Information Memorandums they prepared for each one of those clients. Review at least five of them. Then ask to speak with those clients. Try to find out their style of work. Mostly, try to find out if they delivered on what they promised.