By: Patrick Ungashick
There once was a man engaged to be married. He had never married before, but he had seen what a happy marriage could do for people, and unfortunately, he also had seen what an unhappy marriage could do to people.
The man hoped his marriage to his future spouse would be happy and successful. So, he committed to working with a minister experienced in preparing people for marriage. The minister helped people know, anticipate, and address the issues and challenges that often come with marriage. The minister got to know the man, assessed the man’s readiness for marriage, and then gave feedback and advice to help the man enter into a happy and long marriage.
The man also wanted to share the wonderful moment of his marriage with the people closest to him and his future spouse. So, he committed to working with a wedding coordinator. The wedding coordinator designed a wedding event that would share the couple’s joy and happiness with all of the people whom they cared about, and would run smoothly without stress or unwelcome surprises.
Eventually, the man married. He and his spouse had a wonderful wedding, thanks at least in part to the wedding coordinator. And they lived happily married ever after, thanks at least in part to the minister.
This simple parable can help explain the difference between an exit planner and an investment banker, which is a common question we hear from owners who intend to sell their company. It’s an understandable question, for in many ways an exit planner helps prepare the company for sale, a sale that the investment banker is charged with making happen. But there are key differences between exit planning and investment banking, which is why it is important to think about these two roles separately. In some cases, it can make sense to work with the same firm or team to fulfill both roles, but in other cases, it’s beneficial to work with separate teams.
The man (or woman) seeking to marry is like a business owner seeking to exit, in this case, by selling his company one day. Just as the man has never married before, but he has seen good and bad marriages, the business owner has never exited before, but is aware that some exits are happy, but many are not. Exit, like marriage, changes one’s life in many ways. Being unprepared for exit can lead to significant struggles, just as being unready for marriage.
The minister (or priest, rabbi, counselor, etc.) is like an exit planner. Just as the minister is concerned with the individual’s overall best interests and happiness, so too is the exit planner. The exit planner’s mandate is to help the owner achieve his or her overall exit goals, which often includes: reaching personal financial freedom, leaving the company in good hands, exiting on his/her own terms, and having a sound plan for what to do next in life after exit. To be effective, the exit planner must get to know the owner and the company, and then advise the owner on the best plan and course of action, which may include—depending on the owner’s goals—selling the company. However, at all times, the exit planner must remain objective and committed to achieving what is best for the business owner.
The wedding coordinator is like an investment broker (or business broker, M&A advisor, etc.). Just as the wedding coordinator is focused on a singular event and outcome—the wedding day, the investment banker is focused on a singular event and outcome—the sale of the business. To be effective, the investment banker must be dedicated to the difficult and sometimes fragile process of selling the company. Selling a company is never guaranteed, not to mention selling for an attractive price and favorable terms. Just as the wedding coordinator seeks to make sure everything goes off smoothly with no critical detail unaddressed, so too the investment banker must carefully choreograph the process to minimize factors or risks that can hinder or even block the company sale.
When working for the business owner who wants to sell his or her company, a close and synergistic working relationship typically exists between the exit planner and the investment banker. The exit planner, typically engaged three to five years prior to exit, can help the business owner identify and implement tactics that will increase company value at sale and reduce risk. This tees up the company for the investment banker, who typically comes into the picture about a year before the final sale.
However, note that the two professionals, while serving the same client, do not share the same focus. The exit planner, like the minister, is focused on the business owner’s overall goals and best interests. The investment banker, like the wedding coordinator, is focused on the sale process and closing. Ideally, these two elements remain in alignment, meaning that selling the company (what the investment banker wants) is in the best interests of the business owner (what the exit planner wants). However, things can happen that bring into question whether selling the company is in the owner’s best interests at that time. Common examples include:
- The offer(s) to purchase the company is for a lesser amount that the owner needs or wants
- The offer(s) to purchase the company include terms and/or conditions the owner finds unfavorable
- The offer(s) to purchase the company come from a potential buyer(s) that the owner feels is not a good culture fit
- The business owner comes to realize that he or she is not personally ready to sell the company at that time, often because the owner is unsure about what he or she would do without the business
- The business owner grows unsure about selling the company to an outside buyer and instead seeks either an inside sale or passing the company to the next family generation
Should any of these occur, the investment banker and exit planner may find themselves working toward different outcomes. This benefits nobody, especially the owner. Experienced exit planning and investment banking advisors know these issues and seek to minimize the likelihood that these situations occur. In all cases, business owners and their advisors need to remain clear through the entire process what role every advisor is playing.