Investment Banking 101 Part One: What is an Investment Banker?
(BALTIMORE - August 2, 2008) - Business owners face a myriad of circumstances throughout the difficult and challenging times that mark their business’ development. From idea to business plan to start up/ramp up and inevitably setbacks, the list goes on and on. However, fate is sometimes kind and there comes a time when an entrepreneur’s business grows to a point where more capital is needed to facilitate growth. When such an event occurs, it is wise to call upon someone who can assist you in garnering the necessary expansion capital without interrupting your most important function: the daily operation of your business. It is time to call an investment banker.
WHAT AN INVESTMENT BANKER DOES
When most people have a legal question, they consult the advice of an attorney. If they have a tax problem, they consult a CPA. Who do you call if you have a question concerning raising capital? Most would respond, “ I’d call my local banker” and would be technically right in their answer. However, this limits your source of funding to just one. A better reply would be to contact an investment banker. These individuals have numerous relationships with traditional (banks) and non-traditional (private lenders, wealthy individuals, or insurance companies) funding sources and can help you determine which is right for your situation and needs.
An investment banker’s job is to use their network of relationships and funding sources to the client’s benefit. Of course, the investment banker commands a premium for this service as they are an expert at putting deals together, which has allowed them to amass a wide array of contacts. Simply put, an investment banker is someone whose Rolodex is bigger than yours when it comes to Project Financing and it would behoove many business owners to consult with these experts before taking matters into their own hands. Investment bankers can also assist you with deal structure, raising equity, and negotiations. At the core, an investment banker is an advisor like a CPA or an attorney and it is up to you the client to heed their advice or not but you do so at your own risk.
Investment bankers help their client’s package and underwrite their deal in order to prepare their package for package presentation to potential lenders and/or investors. This involves reviewing financial statements, tax documents, credit reports, pro forma balance sheets, profit and loss statements, etc. During this time, any inconsistencies or negative remarks in their financial picture can be addressed and remedied before being sent out to lenders and/or investors. This is where honesty and frankness are vital. If a client is not upfront with their investment banker in the beginning, things can come back to haunt them once the lender gets the loan package. No matter how trivial the issue or how small you think it might be it’s better to err on the side of caution and ask your advisor (investment banker) to be certain your deal has every opportunity for success.
THE COST OF DOING BUSINESS
The most important thing to remember when working with these professionals is to be flexible and respect that there is a cost for their experience. Only fortune tellers see into the future, hence investment bankers cannot guarantee your financial success. However, there is little doubt any business is better off with professional assistance than without it.
These reputable firms or individuals typically charge modest upfront fees called “retainers”—some of which can be non-refundable—to cover the engagement. They should also tell you that you are hiring them to put forth their best efforts to secure Project Financing for you and your deal. If they are unable to do so or if you need to take certain steps to become fundable, they should inform you of this as well. Of ten times it can be unsettling to hear that your project doesn’t have a leg to stand on (in its present state), especially after you’ve poured your heart and soul into it. Fear not! You’ve got an ally on your side remember? The selected investment banker should be a hired gun who not only will tell you the truth even when you don’t want to hear it but a trusted advisor who is there to offer solutions. Listen to your investment banker! That’s what you hired him to do—offer solutions.
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