Our firm is a “sell-side” investment bank. We prepare and advise successful companies and take them to market for acquisition. We get paid a small percent of the total enterprise value (TEV) paid for our client. “Buy-side” investment bank firms typically take a retainer from an acquirer to seek out target companies that might be looking to be acquired.
The buy-side firm works from a “buy-side mandate,” meaning that an acquirer has cleared the decks to start acquiring companies in a certain sector, if the target companies meet certain parameters. The buy-side firm checks the boxes on behalf of the acquirer, examining typical KPIs like sales, OPEX, and EBITDA. Think of the buy-side firm as a group that vets prospective targets; it can also shield the identity of the acquirer, which is sometimes desirable.
The buy-side firm gets a retainer for their research and networking and will very often contact the target, saying that an acquirer might be interested in them, asking, “Would you like to sign an NDA and have a conversation?”
The buy-side firm will typically dish up a number of prospective targets to the acquirer, to see if the acquirer wants to move to next steps. In addition to receiving its retainer, the buy-side firm often gets paid a percent success fee, if one of the companies they found ultimately gets acquired.
Buy-side Advisory: There is yet another sector of investment banking, and it’s one that our firm engages in. It’s called a “buy-side advisory”. In this case, our client is in the process of trying to buy another company already known to them. They may be unsure of what they should pay, or how the deal might be structured. By the time we start working on this sort of project, the acquirer (our client) is very likely already in conversation with the target company. The acquirer will say to the target, “Hey, we brought in a firm that’s a very active sell-side bank to do a ‘market check’ on your acquisition value.” When engaging in a “market check,” we do not determine that value using, say, a discounted cash flow basis, which some consulting firms use. Instead, we rely on the acquisition values we have obtained for similar companies that were (or are) our clients. The market check is the street price of the company if it went to market regardless of the interest of our client (the acquirer). Think of us as a dispassionate third party that can be an honest broker in determining a fair acquisition price.
To arrive at a market value, we examine the usual financial statements, including historical balance sheets and income statements, and we examine EBITDA adjustments and carefully review how the typical KPIs have performed over time (e. g. net sales, OPEX, OPEX as a percent of sales, EBITDA, and EBITDA as a percent of sales).
In buy-side advisory engagements, we charge a flat consulting fee. We issue a report and confidentially advise our client (the acquirer) on how a deal might be structured: how much cash should be paid at close; how much escrowed (and for how long); how much should be financed (with that debt to be assumed by the target company once it is acquired); how much could be earned out (including ground rules for payouts); and how much might be leveraged in terms of a seller’s note (including the interest rate, terms, and duration of that note). We work with our client’s legal team in drafting an indication of interest or a letter of intent, and then we typically bow out of the process to let the due diligence proceed between the two companies, their lawyers, and their accountants.
If you are looking to acquire another company, the initial conversation is the ideal time to bring in a buy-side advisor for their expertise.
