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Almost every growing firm will need to obtain cash at some point, whether by borrowing, an equity investment, or a merger. The days of choosing an investment bank on the basis of its reputation and trusting the specialists to get financing from private equity companies are over.

As online investing platforms continue to alter the capital-raising environment, only investment banks whose business model and remuneration are closely aligned with the interests of their customers will survive. As a former private equity investor and the CEO of CircleUp, a private equity investment platform, I can attest to this.

One benefit of using some online platforms is that firms seeking funding may regulate who sees their information and ensure that sensitive material does not end up in the hands of hundreds of unscrupulous investors. When an investment bank discloses information on a company, potential investors, usually private equity companies, may keep it for several years.

An entrepreneur may identify which possible investors look at the company’s data and first assess prospective investors’ backgrounds to see if they would be a suitable fit when working with an online private investing platform. Unlike traditional investment banking, the entrepreneur has complete control over the information and the capital-raising process.

 

 

This isn’t to suggest that every investment bank is a poor one. Rather, it is the company’s responsibility to conduct due diligence before to hiring one. The following are the seven questions you must ask:

 

1. What is your rate of success?

Inquire about the percentage of bank engagement letters that result in concluded transactions. While no official research has been performed, I have seen success rates of 25 percent to 35 percent in my private equity tenure. So consider if you’re willing to pay a retainer charge when the chances of concluding a contract are fewer than one in three.

 

2. What makes you want to work for my company?

Insist on specificity from the lenders. If the bankers can’t persuade you that they believe in your management team and your firm, they won’t be able to persuade potential investors when they pitch the company to them.

 

3. How long does it take to close a deal on average?

Allowing the bank to make speculative predictions about how long it will take to conclude a deal is not a good idea. After doing an examination, have the bank clarify its assertion in an email with specifics. The meter starts ticking once you sign an engagement letter with an investment bank. The banker has less incentive to conclude a deal fast if the fee structure is based on a retainer rather than a commission. Investment bankers sometimes require three to four months to begin talking to investors.

 

4. Has the bank worked with businesses of this size before?

Consider what may happen if a larger customer requires attention if investment bankers tend to work with larger firms. Your firm could find itself as a second- or third-tier customer all of a sudden. What if the bank hasn’t had any clients in your industry recently?

 

5. Do you have five references you can provide?

Request referrals to five firms that were previous bank clients in a fundraising attempt, two of which were successful and three of which were not. These references should ideally be from your sector and within your company’s size range. Request that these clients be current, and that they have all worked with your banker, not just the bank.

 

6. Who are the bank’s first five individuals to contact?

Ask for specifics if you own a $15 million food company and the investment banker wants to contact a Fortune 500 corporation. “That’s wonderful,” respond if the banker suggests calling Nestlé. “Who precisely would you call at Nestlé, and when was the last time you spoke with him or her?”

 

7. What are the typical costs charged by the firm?

A large retainer does not offer an incentive for a banker to conclude a deal. Investment banks that rely significantly on commissions, on the other hand, are encouraged to conclude transactions as soon as possible and at the highest feasible price. And they choose to work with firms in which they have a deep belief.

 

 

” This blog offers generic information. By no means, it is professional advice. The information aforementioned is believed to be factually correct. The information provided is solely based on the author’s judgment and is subject to change. This is not endorsed by any 3rd parties or other brands.”

 

 

Article Credits –
entrepreneur.com