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How to Start a Middle Market Investment Bank

In order to build a middle market M&A practice, one must fulfill the two parts of investment banking; coverage & origination and running the M&A process. Coverage & origination is usually reserved for the highest levels of the front office including the Managing Director of the coverage group. In building your own M&A practice, you are going to need to act as the Managing Director yourself as well as fulfill the M&A process once you land an M&A engagement. The following page shows both processes that will be running simultaneously.



  1. Coverage & origination
    1. IB product choice
      1. M&A
      2. Financing
  • Growth advisory
  1. Industry coverage choice
  2. Index building
  3. Multiple, margin & growth tracking
  4. Coverage marketing material
    1. Teaser
    2. Report
  5. Sell side coverage (strategic alternatives)
    1. M&A
    2. Cash needs (financing)
  6. Buy side coverage (mandates)
  7. Pitchbook (strategic alternative specific)
  8. M&A engagement agreement
  1. M&A process
    1. Collect financials
    2. Financial statement model
    3. Adjusted EBITDA calculation
    4. Valuation
      1. Comp companies
      2. Comp transactions
  • DCF
  1. Football field
  1. Marketing material
    1. Teaser
    2. CIM
  2. Teaser distribution
  3. NDA
  4. CIM distribution
  5. Buyer/seller meeting
  6. IOIs/LOIs
  7. Due diligence
    1. Data room
  8. Definitive agreement
  9. Closing & flow of funds


Decide on the industry/industries that you will cover, read/research the value themes/players/multiples in the industry on the following levels:


  1. Large cap
  2. Mid cap
  3. Small cap
  4. Middle market
  5. Lower middle market


Pick an initial vertical and sub-vertical to cover. With AltQuest Group, our initial coverage groups were the following:


  1. Manufacturing
  2. Software
  3. Business Services
  4. Healthcare


After choosing your coverage, the investment banker is then to build an index for each of the verticals and sub-verticals made up with the public comps. The AltQuest Group coverage is broken down in the following manner:


  1. Manufacturing
    1. Durable consumer
    2. Non-durable consumer
    3. Aerospace & defense
    4. Building products
    5. Industrial
    6. Medical
  2. Software
    1. Traditional software
    2. SAAS
    3. Internet
  3. Business Services
    1. Education & Training
    2. Business Process Outsourcing
    3. Facility Services and Industrial Services
    4. Human Resources
    5. Information Services
    6. Marketing Services
    7. Real Estate Services
    8. IT Services
    9. Specialty Consulting
  4. Healthcare
    1. Dental Product
    2. Dental Providers
    3. Medical Devices & Products
    4. Medical Product Distribution
    5. Specialty Providers
    6. Pharma Services
    7. Practice Management
    8. Provider Services
    9. Long Term & Behavioral Care


The investment banker then spreads each public comp and the financial data feeds into the median and average for the vertical and sub-vertical which ultimately ends up in the research (industry report, newsletter), pitchbooks, and CIMs of the investment bank. For investment banks with an equity research department, financial statement models will be built for each public comp that is being covered and consensus EPS data taken from research reports will be used to establish the value of the public comp.


The investment banker ultimately uses the vertical index and sub-vertical index to perform proprietary research and develop industry reports and newsletters which will aid in coverage and ultimately origination. The research, which we will go into greater detail on later in the book focuses on vertical and sub-vertical trends in margins, multiples, and M&A.


After establishing one’s coverage and then building an index for the vertical and sub-vertical as well as establishing relationships with strategic and financial buyers within the vertical and sub-vertical, the investment banker may begin advising targets on their strategic alternatives using information gleaned from the vertical and sub-vertical indices. Regarding the vertical index and sub-vertical index, the investment banker ultimately tracks trends in:


Growth rates




Debt to Equity




The investment banker takes the index and establishes tiers which turn into peer groups. This is why we pull public comps; to benchmark a target against the comps. By comparing a target’s level of performance to it’s peers and the industry in general the investment banker can determine when it is ideal to exit the business (when multiples are strong) and when it is not (when multiples are weak). This is how investment bankers advise on strategic alternatives.


Getting Started in Investment Banking


For those just getting started in investment banking, it is preferable to start with the lower middle market and middle market building relationships with financial and strategic buyers as well as potential targets. This means building your rolodex. Obtain the investment mandates from the strategic and financial buyers and establish a fee arrangement for buy-side deals. This will end up being the Lehman scale for the fee on the buy-side. This is how I built the boutique investment bank, AltQuest Group (


For example, with AltQuest Group, I chose to cover manufacturing. If you are starting in the lower middle market, the goal is to get 10 sell side engagements at any given time. It took me one year to get 10 sell side engagements working 40 hours per week and not on weekends. Further, it is going to take you 6 months to one year to close a deal so stay proactive with origination and mandate/target matching.


To give you an idea of the level of productivity that you should target, the following are the investment banking statistics from year one with AltQuest Group:


3,000 introduction emails

30 sell side pitches (phone and in person)

10 sell side engagements won

4 IOIs from strategic/financial buyers


As you get better and establish a process, your email conversion rates will go up and you will be pitching more and your ability to win sell side engagements will go up. I am at the point now that if a seller is interested in selling, I will either win the sell side mandate or I will structure it as a buy side deal and receive the fee from the strategic/financial buyer.


Looking forward to year two, here are the projections:


1,000 introduction emails

50 sell side pitches (phone and in person)

20 (+18 existing = 38 total engagements) sell side engagements won

8 IOIs from strategic/financial buyers

2 closed M&A deals

$110,000 in M&A fees received


The statistics assume that you will be working full time at 40 hours per week and not working on the weekends.


Regarding fees, here is a simplified understanding of fee structure for sell side engagements. The key to remember here is that you do not make your money when you quote your fee, you make your money when you close the deal. The point is that I would rather win an engagement and give up 1% to 2% of the fee than have the seller think that I am not being fair. The Lehman scale simplifies this a bit but often times the seller will want to know the exact % that they will be paying you.


Large cap – Lehman scale

Mid cap – Lehman scale

Small cap – Lehman scale

Middle market – Double Lehman structure

Lower middle market – 3% to 10%

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