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MDM Investment Bank Guide for Distributors

This guide is intended as a high-level view of potential services offered by investment banks serving the wholesale distribution industry.
 

Every investment bank has its own approach and suite of services, as well as expertise in particular areas; the following is not intended to represent all banks. This guide also does not constitute an endorsement of any specific investment bank on the part of MDM.
 

For specific answers related to your business, please contact an investment bank.
 

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What are an investment bank’s primary activities?

Investment banks serve as advisers to businesses looking for strategic and capital structure alternatives.

Investment banks typically will design and execute a process focused on the benefits and tradeoffs of a business’ alternatives and will recommend and implement the alternative that maximizes the client’s value and objectives.

Investment banks can help with capital raising (debt and equity) and act as advisers for mergers and acquisitions. Primary activities include IPOs, corporate debt, investment management, equity research, restructuring, trading and private wealth management. Investment banks can also help a distributor looking to provide liquidity for shareholders or needing advice on sell-side or buy-side M&A transactions.

What role does an investment bank play in the sale of a distributor’s business?

Investment banks have contacts with not only other strategic distributors, but also financial sponsors like private equity. Investment banks’ relationships can find a buyer and their advisory services can help get the right price.

Investment banks aim to create value maximizing price, speed and certainty in a transaction. Investment banks focus on providing efficient process management reducing the burden of transaction-related activities on management. This may include:

Preparing the business for sale

  • Advising an owner what should happen before selling and what will happen during the sales process
  • Providing valuation guidance ahead of the process
  • Assisting in analyzing and evaluating the business, operations and financial position of the company
  • Clearly articulating the distributor’s competitive advantages and growth story
  • Developing a budget and financial projections tied to the distributor’s growth story
  • Identifying potential synergies that could be available with certain potential acquirers
  • Ensuring that business, financial, legal and other (e.g., HR, insurance, environmental, etc.) information pertinent for the process is collected, reviewed and organized before disclosure to any third party

Developing the marketing materials to sell the business

  • Positioning a company so it is attractive to the right buyers
  • Establishing the investment thesis and key selling attributes of the business
  • Drafting marketing materials to facilitate discussions with potential acquirers
  • Identifying potential strategic and/or financial acquirers

Executing the sale

  • Formulating and recommending a strategy to maximize the outcome of the process
  • Identifying the right buyers, strategic and private equity, and contacting buyers
  • Marketing the business to potential strategic and/or financial acquirers
  • Creating supplemental presentations and analyses to facilitate due diligence

Negotiating and closing the transaction

  • Reviewing and analyzing proposals from potential strategic and/or financial acquirers
  • Counseling the company as to the strategy and tactics for negotiating with potential buyers
  • Assisting in the negotiation of the letter of intent and key terms of the purchase agreement
  • Coordinating due diligence
  • Driving the transaction to a closing

What role does an investment bank play in an acquisition of another business?

Investment banks perform a similar role when a distribution company wants to buy another business as it does when a distributor is selling its own business. Investment banks advise on purchase price, help estimate synergies and advise on potential acquisition targets.

Services may include:

Strategic planning

  • Providing general industry analysis, including desirability of investment in specific market segments
  • Refining acquisition criteria for the business
  • Developing a list of potential targets that fit the acquisition criteria
  • Creating a tailored strategy for approaching each target

Strategy execution

  • Establishing contact directly with each target or its equity holders or its parent company
  • Developing presentations for the board of directors or shareholders regarding the acquisition strategy and status of targets
  • Assisting the company in evaluating the operations and financial position of the business
  • Assessing the strategic rationale of a merger or acquisition
  • Providing valuation guidance
  • Assisting in business and financial analysis, including creating a transaction feasibility study and analyzing synergies
  • Assisting in the negotiation of the letters of intent and key terms of any purchase agreements
  • Accessing additional capital to complete the transaction
  • Analyzing due diligence information from each target

Tips for distributors looking to choose an investment banking partner

  • Understand who will be working with you day-to-day, and make sure you like and trust those individuals. Success will come not from the firm’s name on the business card but rather the specific team that is actually doing the work. You will spend a lot of time with these people.
  • In that same vein, select a partner who will treat the transaction like it’s the most important assignment because that’s exactly what it is for you.
  • Find a partner where the transaction fits from a capabilities perspective. For example, consider consistency with industry focus or relevant completed transactions. Look at whether the firm has access to or relationships with the best potential buyers, or that the size of the deal is not too small or large based on the firm’s historical deals.
  • Look for relevant prior transaction experience. Experience advising similar businesses will help ensure that your partner understands your business model and the key dynamics in your industry. This will allow your adviser to effectively market your business to potential buyers or investors.
  • Consider the investment bank’s established credibility and relationships in the industry.
  • Most banks have different “power alleys.” This may include a particular size of business or an industry that they have particular strength in.
  • Ask for references. Speak with past clients of a potential partner. Select an adviser that has delivered exceptional outcomes and done so with professionalism and integrity.

Questions to ask investment banks

  • How does this process work, and how long will it take?
  • Who will be involved in this transaction and what are their responsibilities?  What are their current workloads given other deals?
  • What comparable transactions have you completed?
  • What is the typical range of transaction sizes that you have completed?
  • How do you maintain confidentiality through a process and deal with sensitive strategic buyers such as competitors?
  • What is the valuation range and your track record of meeting or exceeding this estimate?
  • What is the close rate of your transactions?  Why did certain transactions not close?
  • When is the best time to raise capital?
  • What are the pros and cons of a sale? IPO? Minority investment? Debt Raise?
  • What should we do to prepare for a sale process or capital raise?
  • How would you position the company for sale?
  • What is the market value of the company? How did you arrive at that value?
  • Who are the ‘best’ buyers of the company? Why?
  • How many buyers would you recommend to include in a sale process? What are the pros and cons of a smaller (larger) buyer group?
  • Evaluate the company’s growth opportunities.
  • How will certain growth strategies or potential acquisitions impact a future sale of the company?

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