Unlike investment banks, commercial banks usually generate revenue from interest rates, loans, deposits, other fees, and chargers.
How to Choose an Investment Banker?
Individuals looking to get the maximum value upon selling all or a part of their company should consider hiring an investment banker. Investment bankers possess problem-solving skills to aid businesses to get out of challenging situations and can often substantially increase the selling value of assets. This blog aims to guide people on how to choose an investment banker that is right for their needs.
Choosing the right investment banker is crucial for any business. Since the wrong decision can lead to the business sustaining massive losses in terms of capital and time.
How to Select an Investment Banker That Is Right for You?
Here are 5 things you should consider while selecting an investment banker:
Value of Transactional Deal: Hire a professional who routinely handles organisations, companies, and businesses that are close to your business’s worth:
- Businesses larger than an investment banker’s usual deal size should likely hire someone who has a greater deal size.
- Firms smaller than an investment banker’s usual deal size should likely hire someone with smaller deal sizes to get the effort and attention needed.
Enquire investment bankers about their recent transaction details, including the following.
- Industry type
- Firm size
- Transaction size
The size of the transaction determines the following:
- Investment banker’s fees
- Investment bank’s size
- Deal team’s size
Individuals unsure about what size and type of investment bank to choose should consult bulge bracket organisations to get a better idea of what to choose.
Experience in Industry : It is essential to hire a banker with substantial experience and expertise in your industry sector, as this helps in the following ways:
- Finance professionals require less turnabout or ramp-up duration to complete the transaction.
- Bankers have a better and clearer comprehension of specific industry aspects that affect market valuation.
- Professionals may have established contact and relationships with plausible investors and buyers.
- Investment bankers know relevant industry and market sector trends and fluctuations.
Investment bankers with industry experience can advocate for individuals and organisations more effectively.
Fee Structure and Scheme Compatibility: Investment bankers charge monthly retainers and obtain a closing success fee in the form of a commission in correlation to the firm’s sales.
Factors to consider while hiring an investment banker:
- Talk to several bankers and choose your preferred payment method.
- Enquire about their strategies and the rationale behind them.
- Maintain spreadsheets to calculate fees.
- Consult other advisors on the proposed fees and ensure they are consistent with market rates.
Types of fees investment bankers charge include the following.
Closing Success Fee: It is a commission that investment bankers charge upon successful transaction closing. The quantum of the closing success fee depends on the organisation’s valuation.
Monthly Retainer: Investment bankers often charge an upfront monthly retainer which is applied to the closing success fee.
A success fee has a minimum set threshold and can be fixed or varied according to sales generation.
Other Advisors’ Opinions: Though investment bankers lead business selling processes, they need the cooperation and assistance of other advisors. The two most crucial advisors a business owner has regarding investment banking are:
Proposes suitable investment bankers
Examines bankers’ qualifications, track record, and history
Analyses bankers’ offers on business owner’s behalf
Accompanies business owners at interviews
Keeps expenses to a minimum
Safeguards business owner’s rights
Reduces economic risks
Avoids inconsistent contractual market clauses
Choosing a transaction attorney before hiring an investment banker is vital since an attorney will carefully read a banker's agreement before signing.
The Banker and the Team: A client and banker share a lot of time discussing economic strategies, plans, and courses of action. Therefore, it is of the utmost importance to hire a banker with which the client is comfortable. Here are a few things one should look out for while hiring an investment banker:
- The banker and team are pleased to communicate with and seem trustworthy.
- The professionals assure their clients that they will continue supporting and advising them throughout economic crises.
- The banker and team must entirely commit to accomplishing their client's goals and transactions as soon as possible. This is because risks increase with time.
What Credentials Should an Investment Banker Have?
In addition to having quantitative and analytical proficiency, the educational certifications and qualifications are legitimate investment banker should have the following.
A bachelor's degree in the following disciplines for entry-level jobs:
- Business administration
A master's degree in the following fields for mid to senior-level jobs:
- Business administration
Professional certifications that provide an edge to individuals in the professional field:
- CFP – Certified Financial Planner
- CFA – Chartered Financial Analyst
Other related disciplines required:
What Questions to Ask an Investment Banker?
Here are five important questions to ask while hiring an investment banker:
- Can your investment bank handle my deal?
- Is your deal team directly responsible for my transaction's success?
- Are you motivated by commission or principle?
- How many transactions have your team fulfilled?
- Does your team have sufficient industry experience?
How Much Does an Investment Banker Cost?
Generally, investment bankers in India charge a fee based on a percentage of the deal value, typically ranging from 1% to 5% of the transaction value. However, this fee structure can vary depending on the type of service provided.
For example, if the investment banker is providing only advisory services and not underwriting the securities, the fee may be lower.
In addition to the percentage-based fee, there may be other charges such as retainer fees, due diligence fees, success fees and expenses related to the transaction such as travel and legal costs.
Selecting an investment banker requires investing time and care into it. The correct choice puts businesses and companies on the right path to success. However, the wrong choice can set back businesses and companies unfathomably. Upon assessing all of the factors above on how to choose an investment banker, discuss the matter with an attorney and a CPA.
FAQs About How to Choose an Investment Advisor
Investment banks primarily generate revenue by acting as a bridge between sellers and buyers in various markets, charging certain commissions on sales and trades.
Investment banks offer a few common services: equity advice and research, asset management, accepting economic risks such as insurance, loans, securities, etc., for a fee, assisting in acquisitions and mergers-related processes, etc.
Investment bankers are typically paid a fee based on a percentage of the transaction value. This fee can vary depending on the size and complexity of the transaction.
Investment bankers are regulated by the Securities and Exchange Board of India (SEBI), which sets out rules and regulations for the conduct of investment banking activities.
The time required to complete a transaction with an investment banker can vary depending on the complexity of the deal, market conditions, and regulatory requirements. However, most transactions can take anywhere from a few months to a year to complete.
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