Investment bankers help navigate tricky M&A waters

Infotech and the Law | Legal insights for today's market

David Charles

As the owner of a technology business, one of the most important decisions you will make is to sell your company. One of the most important relationships you will forge in the course of that process is with an investment banker. Thus, it is critical to understand what an investment banker can do for you once you decide to sell your company.

Investment bankers typically are involved in each significant stage of the sale process. At the outset of an engagement, they will conduct an extensive review of your company's financial condition and near-term prospects. This evaluation involves lengthy meetings with senior executives and in-depth document reviews.

Although the primary purpose of this exercise is to gather information for a memorandum used to market your company, the process also prepares your company for due diligence investigations by potential buyers. If coordinated with legal counsel, this evaluation can result in early identification and remediation of latent issues that could delay or derail the sale.

Based on their familiarity with your company's records, some investment bankers will provide substantial assistance in responding to potential buyers' due diligence inquiries and preparing disclosure schedules to the definitive transaction documents.

Investment bankers will use their industry knowledge and contacts to develop a list of potential buyers and, in consultation with you, formulate a strategy for approaching them. They will interact with potential buyers through indications of interest, management presentations and, if all goes well, the negotiation of one or more letters of intent.

They generally take the lead role in representing your company during this phase. They seek to maximize the transaction value by balancing many factors, including an assessment of each potential buyer's ability to close a proposed transaction. After a letter of intent is executed, some will participate actively in reviewing and negotiating the definitive transaction documents, in addition to preparing certain closing documents ? most notably the funds-flow statement.

The fee arrangements generally consist of two components: a retainer and a success fee. Retainers may be structured as one-time, upfront fees, ranging from $10,000 to $100,000, or periodic fees paid. Regardless of a retainer's structure, it should be credited against the portion of the fee that is based on successful completion of the transaction.

Although there is a wide range of models for success fees, some general themes apply to all of them. Success fees in sell-side mergers and acquisition transactions are almost always stated as a percentage of the total consideration.

To establish incentives for the investment banker to get the highest possible price, there is often a sliding scale that starts at 1 percent or 2 percent and escalates to 4 percent or even 6 percent. Some agreements stipulate a minimum success fee to ensure the bankers get a reasonable return on their effort.

In negotiating your fee arrangement with an investment banker, make sure that the highest marginal rates only apply to amounts in excess of a realistic sales price for the business, so that these super fees are only triggered if the process results in a super price. Almost all agreements provide for the success fee to survive termination of the arrangement, so that the banker gets paid if a transaction contemplated by the agreement is completed within a set period of usually six to 12 months.

The relationship you establish with an investment banker will be extremely important to the success of the entire process of selling your company. To get the most out of that relationship, you will need to understand its contours completely.

David Charles is a partner in the Corporate and Securities-Technology practice at Pillsbury Winthrop Shaw Pittman LLP. He can be reached by e-mail at

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