(This article is part one of the three part series: Introduction to Investment Banking in Cincinnati)
No industry loves jargon like the finance industry. “Michaelson, run through the YoY (Year-over-Year) quarterlies to compare trailing EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) against industry comps and to update our multiples and overall TEV (Total Enterprise Value)” is a sentence that technically makes sense, but only if you speak “finance-ese”. The phrase “Investment Banking” itself is one that belongs on the extensive list of overblown vocabulary used by finance professionals to dress up simple ideas in fancy-sounding language. My goal in this short article is to answer the question “What is Investment Banking?”
Investment banking, specifically mergers and acquisitions, is typically broken down into two separate functions: sell-side and buy-side advisory services.
On the buy-side, investment bankers are hired by their clients to find and acquire businesses that fit their client’s needs. As an example, Jill’s Ice Cream Shop may hire a buy-side investment banker to find other ice cream shops in neighboring regions that she can acquire to grow her geographic footprint. Alternatively, Jill, looking to secure better quality cones at a more reasonable price, may hire a buy-side investment banker to look for waffle cone factories, so that she can vertically integrate the business with her ice cream shop. Depending upon the scope of services, the investment banker would locate potential targets, request financial information, negotiate on behalf on Jill, and oversee other third-parties like accountants and lawyers (also known as diligence workstreams) to help Jill find, verify, and acquire the right businesses for her to grow her business geographically.
On the sell-side, investment bankers are hired by their clients to sell a business they already own. As an example, Joe, the founder of Joe’s Taffy Factory has just turned 70 and is ready to spend the rest of his days enjoying golf and margaritas on the sandy shores of Naples. Because Joe’s kids are not interested in taffy (they prefer ice cream) Joe needs a way to monetize the business he has been building over the last 35 years. Sell-side investment bankers would look to identify potential buyers, market Joe’s business to those buyers, negotiate on Joe’s behalf, and oversee other diligence workstreams to help cultivate a deal that achieves Joe’s personal and financial objectives.
In either case, the investment banker is responsible for leading and organizing dozens of stakeholders while maintaining a highly meticulous environment. In our experience, on average this process takes between nine and 18 months to complete. Because the investment banker acts as the conduit through which businesses, lawyers, accountants, tax specialists, and consultants communicate bankers often work longer hours than a typical corporate role. Though, the long hours can translate to a turbo-charged learning experience for many junior bankers.
Typically, most larger investment banks offer both buy-side and sell-side advisory services. Though smaller, “boutique,” banks may only offer one. Additionally, many banks may specialize in the size of business they represent or the industry they cover (e.g., ABC Investment Bank specializes in the food services industry for companies worth $1 million to $50 million). Most investment banks have a strong presence in the region they’re based in, but many have clients outside of their immediate geographic area. For example, an investment bank in Cincinnati may serve clients in New York, Colorado, or California and may find potential buyers or acquisition targets anywhere in the United States or even internationally.
Why do businesses use investment banks? Why can’t a business buy or sell themselves?
They absolutely can! For many businesses there might not be a legal or regulatory requirement to use an investment bank. However, while many business owners are likely experts in their specific industries, they often may not have transactional experience. This fact set is especially true in the lower middle market (companies valued less than $250 million). Buying or selling a business can be a complex undertaking, and without the right advisor key details may be missed.
Clients acquiring a business may want the previous owners engaged for a period after the acquisition, to maintain relationships with previous vendors and customers, and to keep key employees hired and incentivized to stay, amongst many other priorities.
Clients selling their business may be concerned about maximizing the money in their pocket at the close of the transaction, rewarding critical employees, and preserving their brand and legacy, to name a few potential objectives.
It is often helpful to hire an expert in business transactions who knows how to negotiate all the above factors, in addition to knowing other critical issues, topics, and challenges to work through before signing any definitive legal document.
What makes you qualified to write on this topic?
I currently work as an associate at RKCA, an Investment Bank located in Cincinnati, Ohio. We are an industry agnostic bank that has completed both buy and sell-side deals and serves the lower middle market. Most deals we advise on are valued between $10 million and $250 million, though there are outliers on both sides of the spectrum. Stay tuned for the next article where I explore the types of businesses we work with in the Cincinnati investment banking market.
DISCLAIMER:
The content of this material was obtained from sources believed to be reliable. However, RKCA does not warrant the accuracy or completeness of any information contained herein and provides no assurance that this information is, in fact, accurate. The information and data contained herein is for informational purposes only and is subject to change without notice.
The material is provided solely for informational purposes and does not consider the specific objectives, circumstances or profile of any particular buyer or seller and should not be relied upon for any specific course of action. This material should not be considered, construed, or followed as investment, tax, accounting, or legal advice. Any opinions expressed in this material are those of the authors and do not necessarily reflect those of other employees of RKCA. Market data proprietary to source cited, may not be reprinted, reproduced, or used without permission from the source or RKCA.
Investing involves the risk of loss. Past performance is not indicative of future results.
The content of this material should not be construed as a recommendation, offer to sell or solicitation of an offer to buy a particular security or investment strategy.
Investment banking services provided by RKCA, Inc., Member SIPC/FINRA. Non-securities related services provided by RKCA Services, LLC. 1077 Celestial Street, Cincinnati, Ohio 45202. Phone: 513.371.5533.
