e-Matchmaker.biz for e-Commerce

e-Commerce entrepreneurs need many skills to succeed.

First, they must have the technical chops to build and run a superior site.

Next, they must market that site to stand out among the many competitors in a crowded market.

They must also know enough about business to do all the above profitably.

And since no one person can do all of these things well, nearly all of these entrepreneurs must be able to evaluate and hire people with all these skills.

That is, until the day comes to sell the business ' the Holy Grail of the dot-com boom. Then, a whole new set of skills is required.

After all, can anyone whose success comes from operating a business really know how to sell one? He or she may have worked him- or herself out of a job in which success was achieved and into one for which he or she is not equipped to succeed (and in which failure is inevitable).

And, in fact, the owner of a thriving e-commerce business who chooses to sell his or her business may become the living embodiment of The Peter Principle: “In a hierarchy, every employee tends to rise to his level of incompetence.”

Going Online Banker Shopping

A person whose success required the purchase of other businesses certainly may have many of the talents to negotiate a good deal. That seems a given. But the complete package of finding a qualified buyer willing to pay the highest price is probably not something that the average businessperson can pull off, online or in the bricks-and-mortar world, without knowledgeable help. Also, like the attorney who represents him- or herself (but has a fool for a client), the seller may benefit from the objective perspective of a third party.

Fortunately, that help is not hard to find. Online, a world of investment bankers stands ready to locate a qualified, serious buyer and bring the sale of the business to a closing, so that the entrepreneur can cash out from a lifetime of hard work. And today it is literally a “world,” with the assistance of Internet communications; I recently helped a client find investment bankers in Australia for the sale of its subsidiary. Without such help, the business owner risks conducting a search for “Mr. Goodbuyer,” promiscuously flitting from prospect to prospect in a frantic search for the right deal. As explained in other articles, putting your company on the market without procedures to ensure confidentiality, for instance, could lead to loss of business and key employees to competitors eager to prey on customers' and employees' natural tendency to fear change and uncertainty.

(For related issues in the sale of an e-commerce business, see, “Selling Your e-Commerce Company for Private Equity Money,” in the November 2007 edition of e-Commerce Law and Strategy, at www.ljnonline.com/issues/ljn_ecommerce/24_7/news/149510-1.html, and “Punk Rock and the Sale of Your e-Business,” in the January 2007 edition, at www.ljnonline.com/issues/ljn_ecommerce/23_9/news/147939-1.html.)

And not only for-profit businesses need such services ' non-profits often can use investment bankers as well (if they can afford them). For example, a non-profit may have grown so much that it needs greater access to capital or other resources to carry out its mission. Perhaps the initial funders or current management team may be ready to move on. Unlike a business firm, which would close its doors, liquidate the assets and distribute the cash to the owners in these situations (if a third-party sale could not be arranged), a non-profit has no owners, and continues to owe legal duties because it accepted tax-deductible contributions of funds or assets in the past. A successor is necessary to carry forward the purpose for which the non-profit and its donors received special tax treatment. Therefore, the non-profit must find a similar firm willing to take over the mission, and which meets the tax and fiduciary requirement for such a cy pres transfer (the legal term for finding the nearest similar use for such assets whose owner benefited from tax breaks) ' a task no different from finding the right for-profit buyer, and probably farther from the experience of the typical non-profit executive.

Looking for Mr. Goodbuyer

While investment bankers may not be hard to find with the growth of online marketing by professionals, the trick ' as in locating any other type of professional ' is finding the right one for that business, and the markets in which it operates. While even the most novice online searcher can find many investment bankers' Web sites heaped with page after page of generic advice on the sale process, finding the one that is right for your business, especially an e-commerce firm, takes more than random Web-searching. In fact, the process of choosing an advisory firm is very much like the general dating game ' an e-commerce blockbuster in its own right. Just as in choosing a mate, one should not use the Internet to make a final choice, but to conduct online research that can help interested parties locate firms that are viable candidates, and to rule out those that won't make the cut. Just be careful not to rely solely on online sources.

One investment banking expert, Steve N. Economou, managing director of Curtis Financial (www.curtisfinancial.com/cfg_professionals/economou.htm), with whom I have worked on several successful deals, specifically warns against choosing such an advisor exclusively online, with advice that could apply equally to choosing a spouse from one of the many online dating sites. “I am a bit old-fashioned in this regard and believe that relationships and real experience matter,” Economou says. “Internet research may be confirmatory, but I don't think it should be a primary tool.”

In other words, the business owner ' even one whose firm exists only virtually, and who conducts all deals over the Internet ' must look beyond the “brochureware” site, and interview the professionals involved and the company, if separate, to be certain that they are compatible with him or her, just as reading a profile at an online dating site alone won't ensure anyone a successful match. Not only must the right candidate share the owner's objectives, as to projected proceeds and sales strategies, but the right-fit potential partner must also work well with the prospector on a personal level, since they will be “co-habiting,” in a business sense, through what is almost always a stressful sale process.

Economou elaborated on the similarities of picking an investment banker and a mate.

The idea of how an e-commerce company should choose an advisor is a fascinating one. I guess they should look in the mirror and decide whether trust and confidence can be built electronically. Similar questions come to mind. Should you pick your lawyer based solely on price? Should you hire a key employee based solely on their posting on careerbuilder.com? Should you commit yourself to another person for a lifetime (see, I'm old-fashioned about marriage) based on algorithms, and not one on one interaction? How do you develop rapport, trust, experience, confidence, and knowledge based solely on electronic interaction?
I think the computer can be a great research tool and should be utilized, but first a client needs to have good understanding of what they truly need in an advisor, and prioritize those criteria. Then use the Internet for research, and then they should have a couple of meetings.
[Instead,] frequently we see clients choosing advisors based on those which help the client make the most convenient decision. [They] tell the prospect whatever they want to hear and have the slickest Web site. Who do you think is most trust worthy ' someone who might disagree with you in a meeting, or someone who says simply, “We're the firm for you, we have the best industry contacts”?

Is He (or She) Right or Wrong?

So if you know that you eventually have to go offline to pick the best investment banker, how can you distinguish Mr. (or Ms.) Right from many candidates with similar resumes, brochures and deal lists? What factors make an investment-banking firm more likely to be “the one” ' or a Ms. Wrong, who turns out to be far more expensive than dinner and a movie?

Long-time deal-maker Pete Cripps (www.lawsgr.com/Bio/PeterCripps.asp), chair of my firm's Mergers and Acquisitions, and Securities law practice groups, told me what he considers critical in picking the firm that will help sell his client's business. Cripps, who has represented buyers and sellers in deals large and small, highlighted several factors, but emphasized above all else that “the most important issue is picking the right banker for the job.” In frank terms, this means that a banker with a higher fee but one who can get a better deal will beat the one with a lower rate but without the resources to find the best buyers. “I'd rather pay 2% on a $50 million price and net $49 million, than 1.5% on a $40 million price and net $39.4 million,” Cripps says. In other words, the ultimate goal is the net amount in the seller's pocket, rather than the lowest-percentage fee.

Cripps weighs many factors in that choice, including “overall experience and track record, specific industry experience, references, and 'bench strength.' ' [Although] I have had good and bad experiences with big firms as well as one- and two-man shops, on balance, it is better to have more than one person on the team, given the amount of work that needs to be done for successful transaction.” From the perspective of an e-commerce seller, certainly experience in marketing other online firms should be important, not only in knowing how to identify buyers interested in online commerce, but also in dealing with many of the challenges facing an e-commerce seller whose financials don't look the same as a comparable bricks-and-mortar firm (see, “Dressing Your e-Business Up for Success,” in the June 2008 edition of e-Commerce Law and Strategy, at www.ljnonline.com/issues/ljn_ecommerce/25_2/news/150577-1.html).

But, Really: Look for That 'Nice' Personality

From my own experience, I would add another critical factor in identifying “the right banker”: the personality and ability to get a deal closed. Although most bankers get paid significant sums only when a deal closes, I have seen firms that just could not jawbone both sides ' their client as well as the buyer ' to get by the difficult issues that often arise late in a deal. This can be particularly important with sentimental entrepreneurs, who experience seller's remorse when confronted with the reality of selling the firm that they built from scratch and that they developed into a valuable business. In some ways, to carry through the romance analogy, the seller is metaphorically giving up his daughter to a suitor, but with the knowledge that the couple will move away ' permanently. Once the seller is “out” of the company, he can't get back in, or express any opinions about what the buyer may do to “his” company (whether he agrees or disagrees). From my perspective, the ability to overcome emotional-seller objections (and to differentiate them from legitimate business concerns) may be the greatest service sold by an investment banker.

Getting to Know You

Beyond the person-to-person comfort level cited by both experts, Cripps advises that each candidate be asked exactly what services it will provide for its fee. For example:

• Will it help define what should be sold, and how ' a whole company, or separate sales of divisions?
• How it will handle the sale process; as an auction, or as simply a series of negotiations?
• Will the seller be able to approve conversations with prospective buyers, or will the banker push to get the best price regardless of pre-existing relationships with some firms, particularly in the same industry?
• Will the firm screen interested parties for their financial capability to do the deal and coordinate getting initial confidentiality agreements from interested firms?

Depending on the firm and the size of the deal, the investment banker's services could also include such tasks as:

• Preparation of a valuation report;
• Preparation of an “information memorandum” or “teaser” book marketing the business (perhaps in different levels of detail, depending on whether the recipient is a competitor or not);
• Providing a “fairness opinion” (if the seller has outside or public investors); and
• Evaluation of non-cash consideration (such as equity of the buyer).

If the investment banker won't do some of these tasks, then the seller should plan to pay its attorney, accountant or another consultant to execute these services, if its own staff cannot.

First Comes Finding, Then Comes ' Negotiation

But once Mr. Right has been identified, the job is only half done: terms of the investment banker's “engagement” letter must be negotiated (another, albeit unintentional, reminder of the similarities between the human- and business-matching dances). While many firms will lead a seller to believe that this is a standard, nonnegotiable form, in practice, many of its provisions are highly negotiable, especially if the seller is fortunate enough to be able to hold a “beauty contest” among firms auditioning for the seller's business.

The most heavily negotiated provision, in most cases, will be the fee, and when it is to be paid. In the so-called middle market deals common to the tech sector, it is increasingly rare to find a firm that will work only on a contingency, i.e., it gets paid only on “success.” A retainer or base fee will often be due on signing, and the seller will be responsible for out-of-pocket costs incurred to prepare materials and provide advice should a sale never occur. Any such base fee should be credited against the full fee due on a sale. Typically, the fee will be based on the sale price, sometimes on a sliding scale (to provide the banker an incentive to achieve a higher price, and bigger commission). Special provisions may apply if the buyer happens to be someone with whom the seller was already speaking (but whom the banker brings to a close).

Indeed, some bankers define “success” (i.e., when a fee is due) as something other than a completed sale; for instance, presentation of an offer meeting specified criteria on the price and form of payment may earn the fee, regardless of whether the seller chooses to accept it or not. Computing the fee can also create issues. Consider: If part of the price has speculative value today, then how does one value deferred payments or earnouts (which may never be received by the seller)? The same applies to generous employment contracts, or equity of the buyer: The banker wants to be paid, now, without taking the business risk that the seller accepted when it agreed to a non-cash purchase price. Deals that develop into a joint venture pose similar valuation questions, if the seller doesn't get cash at closing from which to pay a fee.

Ah, Yes, Exclusivity, and Some Options

Many other issues can exist in the representation letter beyond the fees, though. For example, investment bankers rarely take on an assignment that is not exclusive for a reasonable period of time. Why should they invest time and energy in a deal, with the greatest compensation coming only at closing, if someone else can get credit (and paid) for finding the buyer?

Similarly, most letters have a “tail period,” i.e., the time after the letter expires when the banker will still get paid if a closing occurs. Both of these provisions are reasonable, and hard to resist.

In theory, companies can try to limit the tail-period exposure to just the business that was marketed, and to potential buyers introduced by the banker while the agreement was in force, so that no fee would be due if a truly new buyer appeared. However, if the seller uses materials prepared by the investment banker in the new deal, then that use may run afoul of typical confidentiality provisions, or trigger the duty to pay a fee anyway.

It may also be possible that there's room to negotiate the “reasonable” duration of exclusivity ' if your adviser can't bring the deal to a close in a few months, then you should not be wedded to it forever. On the other hand, the banker can't allow the seller to terminate the agreement casually; any competent firm will invest a significant amount in any client it chooses to take on, and does not want to let that relationship (and possible fee) be lost lightly.

And, What If?

The banker will also want typical boilerplate indemnification protection against liability, in case it is sued by a frustrated buyer (especially one who believes that it was not given proper disclosure about the selling firm, or even was misled by the materials prepared by the investment banker ' usually based heavily on what the seller provided to it in the first place).

Similarly, even if the banker is not sued, it will require reimbursement of its costs and legal fees if its professionals are forced to appear as witnesses in any litigation between the buyer and the seller.

Most investment bankers are less willing to negotiate these purely legal provisions. However, counsel experienced in drafting such provisions can often modify boilerplate favorable to the creator of the form to make it more acceptable to various parties to the proposal.

e-Commerce Changes Things

Of course, much of the discussion so far could apply equally to negotiation of traditional engagement letters for bricks-and-mortar firms. Several aspects, in contrast, will differ when e-commerce is involved.

It's a Worldwide Market

First, as noted briefly earlier, the market for potential buyers ' and bankers ' is truly worldwide. For example, I have worked with firms in which the principal parties knew every possible buyer or seller in narrow markets in lower Manhattan, in the garment and publishing businesses. While they were extremely effective in their time and space, today the role of marketing a business requires a very different approach.

For example, in the sale of an Australian subsidiary, the case I mentioned at the start of this article, the investment bankers to whom we spoke immediately brought up possible buyers from China and Korea, in addition to the firms on the Australian continent to whom our client thought his deal was limited. Similarly, a seller no longer need ship boxes of information to a physical deal room, or limit one's advisory choices to a geographically convenient office. Once you have convinced yourself that a particular firm is the one to sell your business, you may exchange information with it solely via the Internet.

If international buyers become involved, you may have to be sensitive to cultural differences, regardless of how the Internet has shrunk the world and transcended political and ethnic boundaries. Accountants and attorneys have different roles in other countries, for example. Not only may one need to become familiar with different legal rules and systems, particularly about disclosure and proper dealing, but one may well also have to learn about cultural nuances such as etiquette protocols and language differences, how schedules are made and followed, how chain of command is regarded and implemented, and how the order of meetings proceeds ' all of this online. None of those concerns is any different than in any international transaction, but the sale of an e-commerce firm expands the world of potential buyers, and attention to the details of organizational and national cultural nuance quite often takes on more significance because deals are found, negotiated and executed without person-to-person contact.

Different Strokes for the 'Traditional' Folks

Next, as frequently discussed in this publication, just as the pace of deal making has accelerated, so has work with the investment banker. The “normal” process ' exchanging documents, circulating drafts of an offering memorandum, getting confidentiality agreements and moving forward with a deal ' while never leisurely but far from instantaneous, has become very rapid, with significant events often occurring within days of signing the engagement letter. In other words, while the seller and his or her advisers initially control the deal's timetable (once prospective buyers have been contacted), the seller can't always “ease into the deal,” as once may have been the case. That timetable should be familiar to anyone already involved in e-commerce, but it adds a time pressure to what is by definition a stressful experience from the beginning in any channel of communication, method or place.

Don't Lose the Human Touch

Paradoxically, however, that speed of the deal places all the more importance on the human interaction with an adviser that Economou emphasized. When decisions must be made under pressure, the business owner must have the confidence in his or her representative to rely on that representative's judgment ' and that confidence can't be created just by e-mail (or with a tweet, or whatever form of communication becomes preferred). I have seen deals for e-commerce firms begin and end in less time than one round of traditional due diligence.

In the end, therefore, online investment bankers and Internet matchmakers really have much more in common than romantics (or hard-hearted bankers) than maybe they would want to admit. Despite the advantages and speed of technology, doing things the old-fashioned way, through trusted advisers, will provide the greatest chances for success, whether in romance or in business.

e-Commerce entrepreneurs need many skills to succeed.

First, they must have the technical chops to build and run a superior site.

Next, they must market that site to stand out among the many competitors in a crowded market.

They must also know enough about business to do all the above profitably.

And since no one person can do all of these things well, nearly all of these entrepreneurs must be able to evaluate and hire people with all these skills.

That is, until the day comes to sell the business ' the Holy Grail of the dot-com boom. Then, a whole new set of skills is required.

After all, can anyone whose success comes from operating a business really know how to sell one? He or she may have worked him- or herself out of a job in which success was achieved and into one for which he or she is not equipped to succeed (and in which failure is inevitable).

And, in fact, the owner of a thriving e-commerce business who chooses to sell his or her business may become the living embodiment of The Peter Principle: “In a hierarchy, every employee tends to rise to his level of incompetence.”

Going Online Banker Shopping

A person whose success required the purchase of other businesses certainly may have many of the talents to negotiate a good deal. That seems a given. But the complete package of finding a qualified buyer willing to pay the highest price is probably not something that the average businessperson can pull off, online or in the bricks-and-mortar world, without knowledgeable help. Also, like the attorney who represents him- or herself (but has a fool for a client), the seller may benefit from the objective perspective of a third party.

Fortunately, that help is not hard to find. Online, a world of investment bankers stands ready to locate a qualified, serious buyer and bring the sale of the business to a closing, so that the entrepreneur can cash out from a lifetime of hard work. And today it is literally a “world,” with the assistance of Internet communications; I recently helped a client find investment bankers in Australia for the sale of its subsidiary. Without such help, the business owner risks conducting a search for “Mr. Goodbuyer,” promiscuously flitting from prospect to prospect in a frantic search for the right deal. As explained in other articles, putting your company on the market without procedures to ensure confidentiality, for instance, could lead to loss of business and key employees to competitors eager to prey on customers' and employees' natural tendency to fear change and uncertainty.

(For related issues in the sale of an e-commerce business, see, “Selling Your e-Commerce Company for Private Equity Money,” in the November 2007 edition of e-Commerce Law and Strategy, at www.ljnonline.com/issues/ljn_ecommerce/24_7/news/149510-1.html, and “Punk Rock and the Sale of Your e-Business,” in the January 2007 edition, at www.ljnonline.com/issues/ljn_ecommerce/23_9/news/147939-1.html.)

And not only for-profit businesses need such services ' non-profits often can use investment bankers as well (if they can afford them). For example, a non-profit may have grown so much that it needs greater access to capital or other resources to carry out its mission. Perhaps the initial funders or current management team may be ready to move on. Unlike a business firm, which would close its doors, liquidate the assets and distribute the cash to the owners in these situations (if a third-party sale could not be arranged), a non-profit has no owners, and continues to owe legal duties because it accepted tax-deductible contributions of funds or assets in the past. A successor is necessary to carry forward the purpose for which the non-profit and its donors received special tax treatment. Therefore, the non-profit must find a similar firm willing to take over the mission, and which meets the tax and fiduciary requirement for such a cy pres transfer (the legal term for finding the nearest similar use for such assets whose owner benefited from tax breaks) ' a task no different from finding the right for-profit buyer, and probably farther from the experience of the typical non-profit executive.

Looking for Mr. Goodbuyer

While investment bankers may not be hard to find with the growth of online marketing by professionals, the trick ' as in locating any other type of professional ' is finding the right one for that business, and the markets in which it operates. While even the most novice online searcher can find many investment bankers' Web sites heaped with page after page of generic advice on the sale process, finding the one that is right for your business, especially an e-commerce firm, takes more than random Web-searching. In fact, the process of choosing an advisory firm is very much like the general dating game ' an e-commerce blockbuster in its own right. Just as in choosing a mate, one should not use the Internet to make a final choice, but to conduct online research that can help interested parties locate firms that are viable candidates, and to rule out those that won't make the cut. Just be careful not to rely solely on online sources.

One investment banking expert, Steve N. Economou, managing director of Curtis Financial (www.curtisfinancial.com/cfg_professionals/economou.htm), with whom I have worked on several successful deals, specifically warns against choosing such an advisor exclusively online, with advice that could apply equally to choosing a spouse from one of the many online dating sites. “I am a bit old-fashioned in this regard and believe that relationships and real experience matter,” Economou says. “Internet research may be confirmatory, but I don't think it should be a primary tool.”

In other words, the business owner ' even one whose firm exists only virtually, and who conducts all deals over the Internet ' must look beyond the “brochureware” site, and interview the professionals involved and the company, if separate, to be certain that they are compatible with him or her, just as reading a profile at an online dating site alone won't ensure anyone a successful match. Not only must the right candidate share the owner's objectives, as to projected proceeds and sales strategies, but the right-fit potential partner must also work well with the prospector on a personal level, since they will be “co-habiting,” in a business sense, through what is almost always a stressful sale process.

Economou elaborated on the similarities of picking an investment banker and a mate.

The idea of how an e-commerce company should choose an advisor is a fascinating one. I guess they should look in the mirror and decide whether trust and confidence can be built electronically. Similar questions come to mind. Should you pick your lawyer based solely on price? Should you hire a key employee based solely on their posting on careerbuilder.com? Should you commit yourself to another person for a lifetime (see, I'm old-fashioned about marriage) based on algorithms, and not one on one interaction? How do you develop rapport, trust, experience, confidence, and knowledge based solely on electronic interaction?
I think the computer can be a great research tool and should be utilized, but first a client needs to have good understanding of what they truly need in an advisor, and prioritize those criteria. Then use the Internet for research, and then they should have a couple of meetings.
[Instead,] frequently we see clients choosing advisors based on those which help the client make the most convenient decision. [They] tell the prospect whatever they want to hear and have the slickest Web site. Who do you think is most trust worthy ' someone who might disagree with you in a meeting, or someone who says simply, “We're the firm for you, we have the best industry contacts”?

Is He (or She) Right or Wrong?

So if you know that you eventually have to go offline to pick the best investment banker, how can you distinguish Mr. (or Ms.) Right from many candidates with similar resumes, brochures and deal lists? What factors make an investment-banking firm more likely to be “the one” ' or a Ms. Wrong, who turns out to be far more expensive than dinner and a movie?

Long-time deal-maker Pete Cripps (www.lawsgr.com/Bio/PeterCripps.asp), chair of my firm's Mergers and Acquisitions, and Securities law practice groups, told me what he considers critical in picking the firm that will help sell his client's business. Cripps, who has represented buyers and sellers in deals large and small, highlighted several factors, but emphasized above all else that “the most important issue is picking the right banker for the job.” In frank terms, this means that a banker with a higher fee but one who can get a better deal will beat the one with a lower rate but without the resources to find the best buyers. “I'd rather pay 2% on a $50 million price and net $49 million, than 1.5% on a $40 million price and net $39.4 million,” Cripps says. In other words, the ultimate goal is the net amount in the seller's pocket, rather than the lowest-percentage fee.

Cripps weighs many factors in that choice, including “overall experience and track record, specific industry experience, references, and 'bench strength.' ' [Although] I have had good and bad experiences with big firms as well as one- and two-man shops, on balance, it is better to have more than one person on the team, given the amount of work that needs to be done for successful transaction.” From the perspective of an e-commerce seller, certainly experience in marketing other online firms should be important, not only in knowing how to identify buyers interested in online commerce, but also in dealing with many of the challenges facing an e-commerce seller whose financials don't look the same as a comparable bricks-and-mortar firm (see, “Dressing Your e-Business Up for Success,” in the June 2008 edition of e-Commerce Law and Strategy, at www.ljnonline.com/issues/ljn_ecommerce/25_2/news/150577-1.html).

But, Really: Look for That 'Nice' Personality

From my own experience, I would add another critical factor in identifying “the right banker”: the personality and ability to get a deal closed. Although most bankers get paid significant sums only when a deal closes, I have seen firms that just could not jawbone both sides ' their client as well as the buyer ' to get by the difficult issues that often arise late in a deal. This can be particularly important with sentimental entrepreneurs, who experience seller's remorse when confronted with the reality of selling the firm that they built from scratch and that they developed into a valuable business. In some ways, to carry through the romance analogy, the seller is metaphorically giving up his daughter to a suitor, but with the knowledge that the couple will move away ' permanently. Once the seller is “out” of the company, he can't get back in, or express any opinions about what the buyer may do to “his” company (whether he agrees or disagrees). From my perspective, the ability to overcome emotional-seller objections (and to differentiate them from legitimate business concerns) may be the greatest service sold by an investment banker.

Getting to Know You

Beyond the person-to-person comfort level cited by both experts, Cripps advises that each candidate be asked exactly what services it will provide for its fee. For example:

• Will it help define what should be sold, and how ' a whole company, or separate sales of divisions?
• How it will handle the sale process; as an auction, or as simply a series of negotiations?
• Will the seller be able to approve conversations with prospective buyers, or will the banker push to get the best price regardless of pre-existing relationships with some firms, particularly in the same industry?
• Will the firm screen interested parties for their financial capability to do the deal and coordinate getting initial confidentiality agreements from interested firms?

Depending on the firm and the size of the deal, the investment banker's services could also include such tasks as:

• Preparation of a valuation report;
• Preparation of an “information memorandum” or “teaser” book marketing the business (perhaps in different levels of detail, depending on whether the recipient is a competitor or not);
• Providing a “fairness opinion” (if the seller has outside or public investors); and
• Evaluation of non-cash consideration (such as equity of the buyer).

If the investment banker won't do some of these tasks, then the seller should plan to pay its attorney, accountant or another consultant to execute these services, if its own staff cannot.

First Comes Finding, Then Comes ' Negotiation

But once Mr. Right has been identified, the job is only half done: terms of the investment banker's “engagement” letter must be negotiated (another, albeit unintentional, reminder of the similarities between the human- and business-matching dances). While many firms will lead a seller to believe that this is a standard, nonnegotiable form, in practice, many of its provisions are highly negotiable, especially if the seller is fortunate enough to be able to hold a “beauty contest” among firms auditioning for the seller's business.

The most heavily negotiated provision, in most cases, will be the fee, and when it is to be paid. In the so-called middle market deals common to the tech sector, it is increasingly rare to find a firm that will work only on a contingency, i.e., it gets paid only on “success.” A retainer or base fee will often be due on signing, and the seller will be responsible for out-of-pocket costs incurred to prepare materials and provide advice should a sale never occur. Any such base fee should be credited against the full fee due on a sale. Typically, the fee will be based on the sale price, sometimes on a sliding scale (to provide the banker an incentive to achieve a higher price, and bigger commission). Special provisions may apply if the buyer happens to be someone with whom the seller was already speaking (but whom the banker brings to a close).

Indeed, some bankers define “success” (i.e., when a fee is due) as something other than a completed sale; for instance, presentation of an offer meeting specified criteria on the price and form of payment may earn the fee, regardless of whether the seller chooses to accept it or not. Computing the fee can also create issues. Consider: If part of the price has speculative value today, then how does one value deferred payments or earnouts (which may never be received by the seller)? The same applies to generous employment contracts, or equity of the buyer: The banker wants to be paid, now, without taking the business risk that the seller accepted when it agreed to a non-cash purchase price. Deals that develop into a joint venture pose similar valuation questions, if the seller doesn't get cash at closing from which to pay a fee.

Ah, Yes, Exclusivity, and Some Options

Many other issues can exist in the representation letter beyond the fees, though. For example, investment bankers rarely take on an assignment that is not exclusive for a reasonable period of time. Why should they invest time and energy in a deal, with the greatest compensation coming only at closing, if someone else can get credit (and paid) for finding the buyer?

Similarly, most letters have a “tail period,” i.e., the time after the letter expires when the banker will still get paid if a closing occurs. Both of these provisions are reasonable, and hard to resist.

In theory, companies can try to limit the tail-period exposure to just the business that was marketed, and to potential buyers introduced by the banker while the agreement was in force, so that no fee would be due if a truly new buyer appeared. However, if the seller uses materials prepared by the investment banker in the new deal, then that use may run afoul of typical confidentiality provisions, or trigger the duty to pay a fee anyway.

It may also be possible that there's room to negotiate the “reasonable” duration of exclusivity ' if your adviser can't bring the deal to a close in a few months, then you should not be wedded to it forever. On the other hand, the banker can't allow the seller to terminate the agreement casually; any competent firm will invest a significant amount in any client it chooses to take on, and does not want to let that relationship (and possible fee) be lost lightly.

And, What If?

The banker will also want typical boilerplate indemnification protection against liability, in case it is sued by a frustrated buyer (especially one who believes that it was not given proper disclosure about the selling firm, or even was misled by the materials prepared by the investment banker ' usually based heavily on what the seller provided to it in the first place).

Similarly, even if the banker is not sued, it will require reimbursement of its costs and legal fees if its professionals are forced to appear as witnesses in any litigation between the buyer and the seller.

Most investment bankers are less willing to negotiate these purely legal provisions. However, counsel experienced in drafting such provisions can often modify boilerplate favorable to the creator of the form to make it more acceptable to various parties to the proposal.

e-Commerce Changes Things

Of course, much of the discussion so far could apply equally to negotiation of traditional engagement letters for bricks-and-mortar firms. Several aspects, in contrast, will differ when e-commerce is involved.

It's a Worldwide Market

First, as noted briefly earlier, the market for potential buyers ' and bankers ' is truly worldwide. For example, I have worked with firms in which the principal parties knew every possible buyer or seller in narrow markets in lower Manhattan, in the garment and publishing businesses. While they were extremely effective in their time and space, today the role of marketing a business requires a very different approach.

For example, in the sale of an Australian subsidiary, the case I mentioned at the start of this article, the investment bankers to whom we spoke immediately brought up possible buyers from China and Korea, in addition to the firms on the Australian continent to whom our client thought his deal was limited. Similarly, a seller no longer need ship boxes of information to a physical deal room, or limit one's advisory choices to a geographically convenient office. Once you have convinced yourself that a particular firm is the one to sell your business, you may exchange information with it solely via the Internet.

If international buyers become involved, you may have to be sensitive to cultural differences, regardless of how the Internet has shrunk the world and transcended political and ethnic boundaries. Accountants and attorneys have different roles in other countries, for example. Not only may one need to become familiar with different legal rules and systems, particularly about disclosure and proper dealing, but one may well also have to learn about cultural nuances such as etiquette protocols and language differences, how schedules are made and followed, how chain of command is regarded and implemented, and how the order of meetings proceeds ' all of this online. None of those concerns is any different than in any international transaction, but the sale of an e-commerce firm expands the world of potential buyers, and attention to the details of organizational and national cultural nuance quite often takes on more significance because deals are found, negotiated and executed without person-to-person contact.

Different Strokes for the 'Traditional' Folks

Next, as frequently discussed in this publication, just as the pace of deal making has accelerated, so has work with the investment banker. The “normal” process ' exchanging documents, circulating drafts of an offering memorandum, getting confidentiality agreements and moving forward with a deal ' while never leisurely but far from instantaneous, has become very rapid, with significant events often occurring within days of signing the engagement letter. In other words, while the seller and his or her advisers initially control the deal's timetable (once prospective buyers have been contacted), the seller can't always “ease into the deal,” as once may have been the case. That timetable should be familiar to anyone already involved in e-commerce, but it adds a time pressure to what is by definition a stressful experience from the beginning in any channel of communication, method or place.

Don't Lose the Human Touch

Paradoxically, however, that speed of the deal places all the more importance on the human interaction with an adviser that Economou emphasized. When decisions must be made under pressure, the business owner must have the confidence in his or her representative to rely on that representative's judgment ' and that confidence can't be created just by e-mail (or with a tweet, or whatever form of communication becomes preferred). I have seen deals for e-commerce firms begin and end in less time than one round of traditional due diligence.

In the end, therefore, online investment bankers and Internet matchmakers really have much more in common than romantics (or hard-hearted bankers) than maybe they would want to admit. Despite the advantages and speed of technology, doing things the old-fashioned way, through trusted advisers, will provide the greatest chances for success, whether in romance or in business.