Investment Banks Mostly Work the Sell-Side
Most investment banks work on the sell-side of a client engagement.
Why the Sell-Side?
The largest portion of compensation earned by an investment banker comes from the success fee. Consequently, bankers prefer to work on transactions with a high probability of closing. For reasons discussed below, sell-side engagements have a much higher probability of closing compared to buy-side engagements.
Probability of Closing a Deal
Sellers often have a compelling reason to sell. Perhaps they are of retirement age, have a specific health or family issue, want to pursue a new opportunity, are burned out, etc. Whatever the reason, sellers normally have a fundamental driver for their desire to exit. These motivators are often readily identifiable and help the banker gauge a client’s readiness to sell, given the right offer. With optimal timing and motivation, a banker can reasonably expect a client to consummate a transaction if the banker brings a realistic offer to the table from a legitimate buyer and generally performs the duties outlined in the engagement agreement.
Buyers, however, often find reasons NOT to do a transaction precisely because the buyer may not have a compelling reason to make an acquisition except for the general desire for growth. The reasons buyers give to acquire are often less decisive and thus more difficult for the banker to ascertain the buyer’s commitment to the process.
For illustrative purposes, consider the following two scenarios:
- A 70-year old business owner asks the investment banker to represent him in the sale of his business because he would like to retire and enjoy the grandkids. Besides, he has operated the business for 25 years and is ready to let the next person “take it to the next level” (translation: “let the next person deal with the headaches”).
- A larger corporation asks the investment banker to help find a suitable acquisition target for one of their divisions that they would like to scale through acquisitions.
If these two scenarios are in the same industry, the first scenario (sell-side), is much more likely to transact compared to the second scenario (buy-side). The retiring owner will sell, given a reasonable offer. This is a high probability transaction, which means the banker will likely get paid for her time invested into the project. If the banker represents the buyer, maybe there will be a transaction, maybe not. Acquirers may look at hundreds of businesses and decline to make an offer on all of them. The exception to this is when there is a specific need (a technology or expertise) that the buyer needs to fill quickly within their organization. In this case, there is a higher likelihood of closing a buy-side deal.
But in general, there are numerous, legitimate indicators that a seller is a true seller but few ways to gauge if a buyer is really a buyer. Sometimes buyers are indefinite tire kickers. Sellers close deals. Bankers get paid.
This is why bankers typically prefer to work on the sell-side.