Buy-Side and Sell-Side in M&A

A transaction always involves two parties: a buyer and a seller. Finance professionals commonly describe their positions as being on the buy and sell side of M&A. As with many finance languages, what this means depends on the situation. In the financial industry, these are referred to as the buy-side and sell-side, respectively. As an acquisition and mergers investment manager, you do 2 factors: one presents your bank to potential clients and earns business from them through buy or sell-side Mergers and acquisition, and the other executes the agreements offered by these customers. Let us examine the distinctions.

The buy side M&A

The term “buy side” belongs to financial advisers, often called institutional investors. They collect cash from investors and invest them across many asset classes using a variety of trading strategies. The buy-side of financial services is concerned with discovering potential transactions. This usually means that the investment manager works with private equity organizations to find firms that are looking for a round of funding or to be purchased outright. These options should fit the private equity firm’s investment standards and expand its portfolio of connected enterprises. The goal can sometimes be to enhance their portfolio by supporting them in expanding into a different field, helping an existing platform investment in strengthening their product offering, or decreasing their average entry multiple. Private equity firms typically trade on their own, but working with an investment bank allows them access to the bank’s considerable industry experience, specialist tools, and other resources. It is the role of the investment banker to use these instruments to simplify and aid the transaction. In order to swing negotiations in the buy-favor, the side’s tactics frequently entail minimizing competition for the sale as well as creating strong ties with the sell-side.

The role of a buy-side investment bank

Large strategic acquirers or private equity firms typically hire buy-side investment banks to find companies to acquire or invest in, as well as to assess the integrity of a potential investment. Their goal is to optimize contract terms for the buyer while also successfully closing the deal.

The sell side M and A

The sell-side is the opposing side of the transaction. Rather than hunting for a firm to acquire, the investment bank seeks an investor on behalf of a company they represent. Companies frequently seek finance in order to stimulate future growth of the firm. But maybe they want to combine with a larger company to obtain rapid access to greater resources. Two out of every three businesses never experience a positive return, and being bought frequently provides founders and operators with a much-needed edge, especially during a recession.

In other circumstances, the bank’s client may be aiming to go public and sell shares to prospective investors. However, investment banks can occasionally impact a company’s decision to pursue numerous exit strategies. As we discussed on the buy-side, the ultimate goal is to build relationships and get the best deal possible for the side the bank represents (and the best deal for the bank itself! ), and while an IPO is one of many exit strategies available, it may not be the most lucrative.

Because of the complexities of the process, particularly due diligence, founders will frequently seek the assistance of investment banks in the selling of their firms. They also appreciate the significance of existing business contacts, since the private equity sector relied almost solely on “who you knew” for many decades.

However, investment banks cannot rest on their laurels and wait for the right moment to present itself. Modern organizations use data to their advantage in order to discover transactions more readily and quickly, ensuring those sales conclude, and achieve the best value possible for whichever side of the transaction they represent.

The role of a sell-side investment bank

Sell-side investment banks are frequently hired by founders and private equity firms to liquidate all or a portion of their company’s equity. Entrepreneurs who hire a sell-side firm understand that an experienced investment bank will be better positioned to negotiate with an experienced buyer during the transaction process.

Buy side and sell side M&A

To increase the likelihood of a concluded agreement with favorable terms, both the buy-side and sell-side may frequently employ an investment bank or M&A advisor to execute the transaction. A sell-side M&A adviser is hired by sellers to negotiate with buyers on their behalf, and vice versa.

The distinction between buy-side and sell-side is simple: one party is purchasing, while the other is selling.

Something less clear is that, depending on the conditions and timetable, a given person can operate on the buy-side or sell-side of a transaction. When the time comes to liquidate their investment, a private equity firm that buys shares in a company will eventually migrate to the sell-side. Founders and strategic purchasers can potentially serve as buyers or sellers in an M&A deal.

Buyers and sellers are rarely the only two parties involved in an M&A transaction; investment banks also play an important role in the M&A process and can provide advice on either the buy-side or sell-side.

To further confuse matters, in the context of investment banking M&A, sell side and purchase side refer to totally different things. Sell-side M&A refers specifically to investment bankers working on an engagement when the investment bank’s customer is the seller. Working on the buy-side simply implies that the buyer is the client. This term has nothing to do with the prior sell side/buy side definition.

As a side point, bankers prefer to work on sell-side engagements. This is because when a seller retains an investment bank, they have often taken the choice to sell, boosting the possibility that a deal will occur and a bank will be paid. Meanwhile, investment banks are frequently seeking to acquire buy-side customers, which does not necessarily result in a deal.

Point that: During the due diligence process, a sell side M&A may provide a lot of value. Due diligence is the process by which an interested acquirer or investor digs through the data and papers of a target firm to verify the quality of the company’s earnings and find any unknown liabilities. This can be a difficult process for founders, but it is made much easier when they have an investment bank on their side.

An investment bank could provide buy side sell side M&A advice, couldn’t it?

In many circumstances, investment banks provide advisory services for both sides of a transaction, meaning that they represent a seller in one transaction and a buyer in another.

Banks that provide both buy-side and sell-side advisory services frequently promote this combination, claiming that advising on the buy-side allows them to better understand the requirements and aspirations of strategic acquirers while consulting on the sell-side.

However, these banks fail to see that by working on both sides of the table, they create a significant conflict of interest when representing founders on the sell-side.

In other words, because private equity firms and strategic purchasers are frequent M&A participants, being in their good graces implies repeat business for buy-side consultants.

As a result, a bank that provides both buy-side and sell-side services does not want to play hardball with a significant buyer on behalf of a seller since the bank wants to do business with that buyer the following week. 

FAQ

The distinction between buy-side and sell-side in investment banking is merely one of several roles of a mergers and acquisitions business. Check out our Top Investment Banking FAQs to learn more and discover how data may help dealmakers go ahead.