Bursts of Color - Hiring an M&A Banker

Oct 31, 2024

When should startup founders hire an M&A advisor?

To help answer this question, I turned to Stan Christensen, who founded and ran M&A firm Arbor Advisors for 20 years, during which time he personally negotiated dozens of tech company sales in the $50-250m range. Now retired from banking, Stan pays it forward by teaching at Stanford & BYU, and by hosting a new podcast called All Things Negotiation.

When should a company hire a banker?

Typically, when either:

They have >$10m revenue and a desire to sell the company in the next 1-2 years or
They received a term sheet or serious expression of interest from a strategic buyer

How much will an M&A banker cost?

Retainer: Typically $50-100k up front.
- The retainer enables your banker to get started. This is counterintuitive, but bankers without retainers may just collect option calls while doing little work.
- But you also should avoid paying a monthly retainer, as this incentivizes working slowly.
Success Fee: Typically $1-2 million on closing, negotiated as a share of the transaction.
- In an extraordinary outcome, this might even be >$3m. Negotiate accelerators so that everyone wins in a best-case scenario.
- We have seen some success fees in the $750k range for smaller acquisitions, but it's hard to get bankers to really put in the work below that.
- Tail: Note that the success fee will apply to any transaction within say twelve months from when the banker is signed, even if the banker is not involved in the ultimate deal.

That's expensive. Why do I need a banker?

Valuation: Bankers almost always create more value than they cost. Only once in 20 years did a client tell Stan they thought his price was too high.
Specialization: They do this every day; most founders will do this once in a lifetime.
Workload: It takes an amazing amount of time, since a decent process requires dealing with 40-50 prospective buyers.

How should I select a banker?

Focus on the person, not the firm. Who is the actual person who will do the work and negotiate your deal? Are they compelling and do you trust them?
Ask for specific stories of how they personally negotiated their last transaction/s and got the deals done. Also ask about a deal that fell apart and why.
Ignore overall transaction volume or the firm’s perceived network. All good bankers can make introductions. This part of the job is largely a commodity. What actually matters most is that they will make the effort to connect with people, so ask them how many meetings they got.
Ask for references and talk with them.

What to do if you’re not ready to hire a banker:

DO: Cultivate relationships with the C-Suite of potential strategic buyers. As Molly says in this clip: “All strategic acquisitions come from partnerships.”
DO: Get to know some bankers and hear their ideas/pitches, so that you have someone to call when the time's right.
DON'T: Waste time talking to private equity analysts; in most cases they're just filling out their database.

Should smaller companies (e.g., $1-5m revenue) hire a banker if they're interested in selling?

Maybe. Sometimes a banker can help get these companies sold, when a transaction would not happen without them.
On the other hand, the bankers are not magicians... and founders should know that only about 25% of these deals will get done within 18 months of hiring the banker.

Bursts of Color