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The Interaction Between Private Equity and Investment Banking

February 9, 2016 5:42 am by: Category: Investments Comments Off on The Interaction Between Private Equity and Investment Banking A+ / A-

In the world of mergers and acquisitions, there are buyers and there are sellers. The variety and type of both is about as mixed of a bag as they could possibly be. On the sell-side of the transaction, there are either entrepreneurs and scrappy business-founders. These are those owners that have spent decades or more in building businesses they could be proud of. On the buy-side there are those that buy for investment who are typically outside of the industry (these are most often private equity and family office groups) or those that buy for strategic reasons who reside inside the industry in question. This group is often willing to pay a premium when it comes time to actually acquire the company. Buyers and sellers are often brought together by helpful intermediaries, including business brokers, M&A advisors and investment bankers. Here we will discuss the interaction between these three groups and how they are important to completing a transaction.

In most cases the entrepreneurs know it will be best for them to sell their companies rather than pass them on to the succeeding generations. It is these entrepreneurs that often have a difficult time in distinguishing how best to either sell their business or make the slow transition away from their business. Knowing how investment bankers work with private equity and venture capital groups is extremely helpful.

The investment banker not only takes some of the heat off the company seller, but he or she also helps to advise the seller on the best and most appropriate action to take. For instance, most company sellers only sell a business maybe once or twice in their life. Company buyers, on the other hand, are often professional merger and acquisition folks. They spend their entire lives sourcing, courting, vetting and buying companies across all sectors. In short, they have more experience in buying companies than most individual sellers have experienced in their lifetime.

In many cases, investment bankers will bring in an entire team of expert business planners, tax consultants, exit/succession planning strategists and wealth managers to create a holistic approach to selling the business. This means the selling owner is able to worry only about the things that matter most as the transaction progresses to eventual close. These groups work together in tandem, helping the owner prepare everything from estate planning to taxes at the time of the transaction to ensure the business is sold without a hitch.

While most of the high-flying and high valuation transactions that are mentioned in the press have to do with strategic buyers paying some ridiculous premium for a company, in most cases companies are sold for simple math-related multiples. Valuations are typically very simple and private equity buyers rarely pay more than they think the business is worth. There is nothing worse than overpaying for the business in question. That is simply how private equity groups operate. The power is all in the buy. Certainly investment banks will work to boost the value in what is paid in instances like that, but that does not mean that company owners should expect some ridiculous multiple of earnings or revenue from their small, regionally-based company.

In reality, most deals are not completed on a handshake either. It takes time to complete a good transaction. Often months and sometimes years, as sellers prepare early and often for the eventual sale of the business. For those most interested in finding the right buyer that can pay a premium, private equity may not be the best route. However, if the investment banking firm or intermediary is able to get a good deal done between the parties, everyone eventually wins.

About Jeffery A. Brown

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