Similar to asking the right questions when interviewing people, asking the right questions when checking references is an equally daunting proposition. Your strategy is clear, determine who would do a good job, but the tactics to determine that are where things get squishy. Asking the wrong questions can inadvertently tip off the other person and they’ll end up giving you the answer they think you want to hear.
When devising reference check questions, your guiding light should be to ask questions that give you usable data that help you make a decision. This is easier said than done, of course. Without suitable advanced planning, the questions you’ll ask will be of “I think I need to ask this” variety. So let’s examine five typical questions that you might think you should ask and contrast them with questions that will give you usable data.
Meaningless question #1: “What did they charge?”
This is a common question because what a service costs should be considered before deciding to hire any kind of an advisor. But does the answer, any answer, to this question give you anything usable that will help you decide whether or not to hire the investment banker? The answer to that question is, “No, of course not.”
Useful question #1: Was their work worth what you paid?
Price, in and of itself, doesn’t provide much of a data point. If you were sold a dinner for $100 for two people, would that tell you anything? Of course not. You need to determine what is included in that meal. If the meal was a hamburger, fries, and soft drink from a national fast food chain, $100 would be an outrageous price. But if the meal was say, a USDA prime steak, lobster bisque, escargot, a salad, and a bottle of Opus One, all served to you and your guest in a 4 star restaurant, $100 would be an absolute bargain.
Your focus should be on determining if the service was of value commensurate with the price paid. Price only gives you half the story.
Meaningless question #2: How long did it take?
Because of countless vagaries with doing deals, the length of time needed to close a transaction is an almost meaningless metric. A deal that closes in 6 months might be a bad deal. A deal that took a year and half might be the best thing for the seller.
Useful question #2: Did they do what they said they’d do?
Determining if the investment banker followed up, followed through, and accomplished what they said they would accomplish will go a long way in helping you determine the efficacy of the investment banker.
Meaningless question #3: Do they know a lot of buyers?
As discussed in the article “How to Hire an Investment Banker” this question repeatedly comes up when business owners and executives are interviewing investment bankers. Unfortunately, this question doesn’t provide a useful data point for a simple reason: buyers are a dime a dozen, they are easy to find. Buyers want to hear about companies for sale.
Useful question #3: Did they attend all meetings with the buyers? If not, why?
An investment banker should always attend meetings between its client (the seller) and any and all buyers. Leaving a seller alone with a buyer is a mistake. Buyers often want to meet privately with sellers and when they do, it isn’t for the seller’s sake! Rightly or wrongly, they view an opportunity to gain unfettered access to the owner as a way to craft a better deal…for themselves.
Buyers are motivated by self-interest and nothing is wrong with that, of course. Sellers are wise to remember that they have a responsibility to themselves to craft the best deal possible. Getting the investment banker out of the mix is helpful only to the buyer.
A good investment banker will make sure the meeting stays on track and stays on topic. The investment banker will handle difficult questions. And most importantly, the investment banker will make sure the meeting doesn’t devolve into a deal negotiation. Negotiations should be handled separately from any meeting involving the seller. For a reminder of what M&A investment bankers do, please see Why Should I Retain an Investment Banker to Sell My Business?
If an investment banker does not attend all meetings between buyer and seller, the investment banker is not doing a good job.
Meaningless question #4: Did they get the highest price?
All else being equal, a high price is obviously better than a low price. But “high” or “low” are subjective. How can someone answer that question? Most likely, the seller accepted the highest offer, but what was the final price at closing? The same as the initial offer, or did the buyer whittle away at the price?
Useful question #4: Did the buyer try to re-trade the deal and if so, how did the investment banker handle it?
Determining how an investment banker handled the dreaded retrade is far more important than trying to determine if the price was “high.” The reason to ask this question is to determine how the investment banker parried this question and to learn if the investment banker was able to maintain the agreed upon valuation.
Meaningless question #5: Did they do a good job?
This is yet another subjective question. What is someone going to say when asked a leading question like that? Of course the answer will be, “yes, they did a good job.”
Useful question #5: Could you have done this on your own without them?
You want to hear the seller say, “We could not have done what they did for us.” If the investment banker did a good job, the seller will realize how much work is involved in a business sale. The amount of upcoming work might not be evident at the start of the process, but in hindsight and if the investment banker did a good job, the seller easily should be able to see the value of the investment banker’s work.
If a seller says, “Well, we ended up with a good deal, but we did all the work, they used the book we put together, they didn’t come to meetings with the buyers, and our lawyer did all of the negotiating,” don’t hire them.
Any references you get from an investment banker will be from people who the investment banker knows will say positive things. In order get information that will help you make a decision, you should avoid asking leading questions and instead dig deeper. You want to determine the value of the work, how well the investment banker followed up, how well they ran the process, how adept they were at negotiating, and most importantly, the how much impact did they have on the final result.
© 2016, Bill Snow, Managing Director, Jordan, Knauff & Company, Chicago, IL. All rights reserved. 312-254-5904, firstname.lastname@example.org