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How to Build a Boutique Investment Bank/M&A Firm

September 29, 2019
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At Investment Banking University, we are often asked , “How to build a boutique investment bank?”, so we created a methodology for doing so consistent with that which built AltQuest Group (www.AltQuest.com), the middle market boutique investment bank. This methodology is known as the Boutique Investment Bank Methodology which goes as follows:

Decide on IB product (M&A, capital-raising, growth advisory)
Decide on size of market to cover (public co’s, middle market, lower middle market)
Decide on industry coverage (AltQuest’s coverage is broken down between Healthcare, Manufacturing, Software, and Business Services)
Break down industry into sub-verticals to cover
Build indices for industry and sub-verticals made up of public co’s
Utilize Coverage & Origination Methodology to advise targets on strategic alternatives
Utilize Mandate/Target Matching Methodology to match strategic and financial buyers’ mandates to targets
Gather financials, recast & IB deliverables (adjusted EBITDA, valuation, teaser, CIM, management presentation)
Offer analysis
Purchase agreement drafting/structuring
Due diligence data room
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:

Large cap
Mid cap
Small cap
Middle market
Lower middle market

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

Manufacturing
Software
Business Services
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:

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

The indices for AltQuest Group look like the following:

Manufacturing
1. AltQuest Durable Consumer Index
  1. Newell Brands Inc. NYSE:NWL
  1. Whirlpool Corp. NYSE:WHR
  1. Hanesbrands Inc. NYSE:HBI
  1. Gildan Activewear Inc. NYSE:GIL
  1. Brunswick Corporation NYSE:BC
  1. Tupperware Brands Corporation NYSE:TUP
  1. G-III Apparel Group, Ltd. NasdaqGS:GIII
  1. La-Z-Boy Incorporated NYSE:LZB
  1. Culp, Inc. NYSE:CFI
  1. Flexsteel Industries Inc. NasdaqGS:FLXS
  1. Johnson Outdoors Inc. NasdaqGS:JOUT
  1. CSS Industries Inc. NYSE:CSS
  1. Delta Apparel Inc. AMEX:DLA
  1. Escalade Inc. NasdaqGM:ESCA
  1. Black Diamond, Inc. NasdaqGS:BDE
1. AltQuest Non-Durable Consumer Index
  1. Colgate-Palmolive Co. NYSE:CL
  1. General Mills, Inc. NYSE:GIS
  1. Campbell Soup Company NYSE:CPB
  1. The Clorox Company NYSE:CLX
  1. Church & Dwight Co. Inc. NYSE:CHD
  1. Coty Inc. NYSE:COTY
  1. Edgewell Personal Care Company NYSE:EPC
  1. Avon Products Inc. NYSE:AVP
  1. Inter Parfums Inc. NasdaqGS:IPAR
1. AltQuest Aerospace & Defense Index
  1. Honeywell International Inc. NYSE:HON
  1. The Boeing Company NYSE:BA
  1. General Dynamics Corporation NYSE:GD
  1. Airbus Group SE ENXTPA:AIR
  1. Mohawk Industries Inc. NYSE:MHK
  1. TransDigm Group Incorporated NYSE:TDG
  1. Textron Inc. NYSE:TXT
  1. Spirit AeroSystems Holdings, Inc. NYSE:SPR
  1. B/E Aerospace Inc. NasdaqGS:BEAV
  1. Bombardier Inc. TSX:BBD.B
  1. HEICO Corporation NYSE:HEI
  1. Curtiss-Wright Corporation NYSE:CW
  1. Esterline Technologies Corp. NYSE:ESL
  1. Triumph Group, Inc. NYSE:TGI
  1. RBC Bearings Inc. NasdaqGS:ROLL
  1. Aerojet Rocketdyne Holdings, Inc. NYSE:AJRD
  1. Ducommun Inc. NYSE:DCO
1. AltQuest Building Products Index
  1. Mohawk Industries Inc. NYSE:MHK
  1. USG Corporation NYSE:USG
  1. Armstrong World Industries, Inc. NYSE:AWI
  1. Advanced Drainage Systems, Inc. NYSE:WMS
  1. Apogee Enterprises, Inc. NasdaqGS:APOG
  1. Builders FirstSource, Inc. NasdaqGS:BLDR
  1. American Woodmark Corp. NasdaqGS:AMWD
  1. Gibraltar Industries, Inc. NasdaqGS:ROCK
  1. Continental Building Products, Inc. NYSE:CBPX
  1. Insteel Industries Inc. NasdaqGS:IIIN
  1. Armstrong Flooring, Inc. NYSE:AFI
1. AltQuest Industrial Index
  1. United Technologies Corporation NYSE:UTX
  1. Illinois Tool Works Inc. NYSE:ITW
  1. Eaton Corporation plc NYSE:ETN
  1. Ingersoll-Rand Plc NYSE:IR
  1. Parker-Hannifin Corporation NYSE:PH
  1. Rockwell Automation Inc. NYSE:ROK
  1. Crane Co. NYSE:CR
  1. Hubbell Inc. NYSE:HUBB
  1. Colfax Corporation NYSE:CFX
  1. Barnes Group Inc. NYSE:B
  1. Actuant Corporation NYSE:ATU
  1. Albany International Corp. NYSE:AIN
  1. EnPro Industries, Inc. NYSE:NPO
  1. Chart Industries Inc. NasdaqGS:GTLS
  1. Columbus McKinnon Corporation NasdaqGS:CMCO
1. AltQuest Medical Index
  1. Medtronic plc NYSE:MDT
  1. DENTSPLY SIRONA Inc. NasdaqGS:XRAY
  1. Hologic Inc. NasdaqGS:HOLX
  1. Abaxis, Inc. NasdaqGS:ABAX
  1. Analogic Corporation NasdaqGS:ALOG
  1. Integer Holdings Corporation NYSE:ITGR
  1. AngioDynamics Inc. NasdaqGS:ANGO
  1. Misonix, Inc. NasdaqGM:MSON
  1. Amedica Corporation NasdaqCM:AMDA
  1. Allied Healthcare Products Inc. NasdaqCM:AHPI
Software
1. AltQuest Traditional Software Index
1. AltQuest SAAS Index
  1. 2U TWOU NasdaqGS
  1. Amber Road AMBR NYSE
  1. Athenahealth ATHN NasdaqGS
  1. Bazaarvoice BV NasdaqGS
  1. Benefitfocus BNFT NasdaqGS
  1. Callidus Software CALD NasdaqGM
  1. Castlight Health CSLT NYSE
  1. ChannelAdvisors ECOM NYSE
  1. Cornerstone OnDemand CSOD NasdaqGS
  1. Covisint COVS NasdaqGS
  1. Ebix EBIX NasdaqGS
  1. FireEye FEYE NasdaqGS
  1. Fleetmatics FLTX NYSE
  1. HortonWorks HDP NasdaqGS
  1. HubSpot HUBS NYSE
  1. inContact SAAS NasdaqCM
  1. IntraLinks Holdings IL NYSE
  1. J2 Global JCOM NasdaqGS
  1. Jive Software JIVE Nasdaq
  1. Live Person LPSN NasdaqGS
  1. Marin Software MRIN NYSE
  1. Medical Transcript MTBC NasdaqCM
  1. Medidata Solutions MDSO Nasdaq
  1. Netsuite N NYSE
  1. New Relic NEWR NYSE
  1. Paylocity Holding PCTY NasdaqGS
  1. Q2 Holdings QTWO NYSE
  1. Qualys QLYS NasdaqGS
  1. RealPage RP Nasdaq
  1. RingCentral RNG NYSE
  1. Salesforce.com CRM NYSE
  1. Service-now.com NOW NYSE
  1. SPS Commerce SPSC NasdaqGS
  1. Tableau Software DATA NYSE
  1. Tangoe TNGO NasdaqGS
  1. The Ultimate Software Group ULTI NasdaqGS
  1. TrueCar TRUE NasdaqGS
  1. Upland Software UPLD NasdaqGM
  1. Veeva Systems VEEV NYSE
1. AltQuest Internet Index
1-800-FLOWERS.com FLWS NasdaqGS
58.com WUBA NYSE
8×8 EGHT NasdaqGS
Akamai Technologies AKAM NasdaqGS
Alibaba BABA NYSE
Amazon.com AMZN NasdaqGS
Angie’s List ANGI NasdaqGS
Baidu.com BIDU NasdaqGS
Bankrate RATE NYSE
Bitauto Holdings BITA NYSE
BlueNile NILE NasdaqGS
Brightcove BCOV NasdaqGS
BroadSoft BSFT NasdaqGS
Carbonite CARB NasdaqGS
Care.com CRCM NYSE
ChangYou.com CYOU NasdaqGS
Chegg CHGG NYSE
Cimpress CMPR NasdaqGS
Coupons.com QUOT NYSE
Criteo SA CRTO NasdaqGS
Ctrip CTRP NasdaqGS
DemandMedia DMD NYSE
eBay EBAY NasdaqGS
eHealth EHTH NasdaqGS
Everyday Health EVDY NYSE
Expedia EXPE NasdaqGS
Facebook FB NasdaqGS
GoDaddy GDDY NYSE
Google GOOG NasdaqGS
Groupon GRPN NasdaqGS
GrubHub GRUB NYSE
Harmonic HLIT NasdaqGS
Interactive Intelligence ININ NasdaqGS
LendingClub LC NYSE
LifeLock LOCK NYSE
Limelight Networks LLNW NasdaqGS
LinkedIn LNKD NYSE
Liquidity Services LQDT NasdaqGS
Mail.ru Group 61HE.L LSE
MakeMyTrip MMYT NasdaqGS
MaxPoint Interactive MXPT NasdaqGM
Mercadolibre MELI NasdaqGS
Mitel Networks MITL NasdaqGS
Monster Worldwide MWW NYSE
NCSoft 036570.KS KSE
Netease NTES NasdaqGS
Netflix NFLX NasdaqGS
Overstock.com OSTK NasdaqGS
Pandora P NYSE
PetMed Express PETS NasdaqGS
Priceline PCLN NasdaqGS
QuinStreet QNST NasdaqGS
Renren RENN NYSE
Rocket Fuel FUEL NasdaqGS
SeaChange International SEAC NasdaqGS
ShoreTel SHOR NasdaqGS
Shutterfly SFLY NasdaqGS
Shutterstock SSTK NYSE
SINA SINA NasdaqGS
Sohu.com SOHU
Sonus Networks SONS NasdaqGS
Stamps.com STMP NasdaqGS
Synacor SYNC NasdaqGS
Tencent Holdings NNN1.F
The Rubicon Project RUBI NYSE
TheStreet.com TST NasdaqGM
Travelzoo TZOO NasdaqGS
Lending Tree TREE NasdaqGS
Tremor TRMR NYSE
TripAdvisor TRIP NasdaqGS
TubeMogul TUBE NasdaqGS
Tucows TCX NasdaqCM
Twitter TWTR NYSE
VeriSign VRSN NasdaqGS
WebMD Health WBMD NasdaqGS
Wix.com WIX NasdaqGS
XO Group XOXO NYSE
Xunlei XNET NasdaqGS
Yahoo! YHOO NasdaqGS
Yandex YNDX NasdaqGS
Yelp YELP NYSE
YuMe YUME NYSE
YY YY NasdaqGS
Zillow Z NasdaqGS
Business Services
1. AltQuest Education & Training Index
  1. Graham Holdings Company NYSE:GHC
  1. GP Strategies Corp. NYSE:GPX
  1. Pearson plc LSE:PSON
  1. John Wiley & Sons Inc. NYSE:JW.A
  1. Capella Education Co. NasdaqGS:CPLA
  1. Bridgepoint Education, Inc. NYSE:BPI
  1. Strayer Education Inc. NasdaqGS:STRA
  1. K12, Inc. NYSE:LRN
  1. DeVry Education Group Inc. NYSE:DV
  1. Career Education Corp. NasdaqGS:CECO
1. AltQuest Business Process Outsourcing Index
  1. Wipro Ltd. BSE:507685
  1. Cognizant Technology Solutions Corporation NasdaqGS:CTSH
  1. Sykes Enterprises, Incorporated NasdaqGS: SYKE
  1. Convergys Corporation NYSE: CVG
  1. West Corporation NasdaqGS:WSTC
  1. TeleTech Holdings Inc. NasdaqGS:TTEC
  1. Virtusa Corporation NasdaqGS:VRTU
  1. Unisys Corporation NYSE:UIS
1. AltQuest Facility Services and Industrial Services Index
  1. Cintas Corporation NasdaqGS:CTAS
  1. ABM Industries Incorporated NYSE:ABM
  1. SP Plus Corporation NasdaqGS:SP
  1. Aramark NYSE:ARMK
  1. Iron Mountain Incorporated NYSE:IRM
  1. UniFirst Corp. NYSE:UNF
  1. FirstService Corporation TSX:FSV
  1. Waste Management, Inc. NYSE:WM
  1. Republic Services, Inc. NYSE:RSG
  1. Waste Connections US, Inc. NYSE:WCN
  1. Stericycle, Inc. NasdaqGS:SRCL
  1. US Ecology, Inc. NasdaqGS:ECOL
  1. Casella Waste Systems Inc. NasdaqGS:CWS
  1. Covanta Holding Corporation NYSE:CVA
  1. Clean Harbors, Inc. NYSE:CLH
  1. United Rentals, Inc. NYSE:URI
  1. H&E Equipment Services Inc. NasdaqGS:HEES
  1. CECO Environmental Corp. NasdaqGS:CECE
  1. Team, Inc. NYSE:TISI
1. AltQuest Human Resources Index
  1. Robert Half International Inc. NYSE:RHI
  1. ManpowerGroup Inc. NYSE:MAN
  1. WageWorks, Inc. NYSE:WAGE
  1. On Assignment Inc. NYSE:ASGN
  1. 51job Inc. NasdaqGS:JOBS
  1. Insperity, Inc. NYSE:NSP
  1. TriNet Group, Inc. NYSE:TNET
  1. Korn/Ferry International NYSE:KFY
  1. TrueBlue, Inc. NYSE:TBI
  1. Kelly Services, Inc. NasdaqGS:KELY.A
  1. Kforce Inc. NasdaqGS:KFRC
  1. Automatic Data Processing, Inc. NasdaqGS:ADP
  1. Heidrick & Struggles International Inc. NasdaqGS:HSII
1. AltQuest Information Services Index
  1. Thomson Reuters Corporation TSX:TRI
  1. Acxiom Corporation NasdaqGS:ACXM
  1. Gartner Inc. NYSE:IT
  1. Alliance Data Systems Corporation NYSE:ADS
  1. The Dun & Bradstreet Corporation NYSE:DNB
  1. comScore, Inc. NasdaqGS:SCOR
  1. Fair Isaac Corporation NYSE:FICO
  1. Experian plc LSE:EXPN
  1. Equifax Inc. NYSE:EFX
  1. The Advisory Board Company NasdaqGS:ABC
  1. Verisk Analytics, Inc. NasdaqGS:VRSK
  1. CoreLogic, Inc. NYSE:CLGX
  1. CoStar Group Inc. NasdaqGS:CSGP
  1. FactSet Research Systems Inc. NYSE:FDS
  1. Moody’s Corporation NYSE:MCO
  1. Forrester Research Inc. NasdaqGS:FORR
  1. IHS Markit Ltd. NasdaqGS:INFO
1. AltQuest Marketing Services Index
  1. WPP plc LSE:WPP
  1. Omnicom Group Inc. NYSE:OMC
  1. Publicis Groupe SA ENXTPA:PUB
  1. The Interpublic Group of Companies, Inc. NYSE:IPG
  1. MDC Partners Inc. NasdaqGS:MDCA
  1. InnerWorkings Inc. NasdaqGS:INWK
  1. Ipsos SA ENXTPA:IPS
  1. UBM plc LSE:UBM
1. AltQuest Real Estate Services Index
  1. CBRE Group, Inc. NYSE:CBG
  1. CoStar Group Inc. NAsdaqGS: CSGP
  1. Jones Lang LaSalle Incorporated NYSE:JLL
  1. Realogy Holdings Corp. NYSE:RLGY
  1. SouFun Holdings Ltd. NYSE: SFUN
  1. NM Kennedy-Wilson Holdings, Inc. NYSE:KW
  1. E-House (China) Holdings Limited NYSE:EJ
  1. RE/MAX Holdings, Inc. NYSE:RMAX
  1. Altisource Portfolio Solutions S.A. NasdaqGS:ASPS
1. AltQuest IT Services Index
  1. International Business Machines Corporation NYSE:IBM
  1. Accenture plc NYSE:ACN
  1. Cognizant Technology Solutions Corporation NasdaqGS:CTSH
  1. CGI Group Inc. TSX:GIB.A
  1. Booz Allen Hamilton Holding Corporation NYSE:BAH
  1. Leidos Holdings, Inc. NYSE:LDOS
  1. Teradata Corporation NYSE:TDC
  1. EPAM Systems, Inc. NYSE:EPAM
  1. Interxion Holding NV NYSE:INXN
  1. CACI International Inc. NYSE:CACI
  1. ManTech International Corporation NasdaqGS:MAN
  1. Virtusa Corporation NasdaqGS:VRTU
  1. The Hackett Group, Inc. NasdaqGS:HCKT
  1. Unisys Corporation NYSE:UIS
  1. ServiceSource International, Inc. NasdaqGS:SREV
1. AltQuest Specialty Consulting Index
  1. CEB Inc. NYSE:CEB
  1. FTI Consulting, Inc. NYSE:FCN
  1. Exponent Inc. NasdaqGS:EXPO
  1. The Advisory Board Company NasdaqGS:ABC
  1. Huron Consulting Group Inc. NasdaqGS:HUR
  1. ICF International Inc. NasdaqGS:ICFI
  1. Navigant Consulting Inc. NYSE:NCI
  1. Resources Connection, Inc. NasdaqGS:RECN
  1. CBIZ, Inc. NYSE:CBZ
Healthcare
1. AltQuest Dental Product Index
  1. Zimmer Biomet Holdings, Inc. NYSE:ZBH
  1. DENTSPLY SIRONA Inc. NasdaqGS:XRAY
  1. Henry Schein, Inc. NasdaqGS:HSIC
  1. Align Technology Inc. NasdaqGS:ALGN
  1. Patterson Companies, Inc. NasdaqGS:PDCO
  1. Cantel Medical Corp. NYSE:CMN
  1. BIOLASE, Inc. NasdaqCM:BIOL
  1. Milestone Scientific Inc. AMEX:MLSS
  1. Pro-Dex Inc. NasdaqCM:PDEX
1. AltQuest Dental Providers Index
  1. Birner Dental Management Service OTCPK:BDMS
1. AltQuest Medical Devices & Products Index
  1. Medtronic plc NYSE:MDT
  1. Abbott Laboratories NYSE:ABT
  1. Stryker Corporation NYSE:SYK
  1. Becton, Dickinson and Company NYSE:BDX
  1. Boston Scientific Corporation NYSE:BSX
  1. Baxter International Inc. NYSE:BAX
  1. Intuitive Surgical, Inc. NasdaqGS:ISRG
  1. Zimmer Biomet Holdings, Inc. NYSE:ZBH
  1. St. Jude Medical Inc. NYSE:STJ
  1. Edwards Lifesciences Corp. NYSE:EW
  1. CR Bard Inc. NYSE:BCR
  1. ABIOMED, Inc. NasdaqGS:ABMD
  1. Integra LifeSciences Holdings Corporation NasdaqGS:IART
  1. Wright Medical Group N.V. NasdaqGS:WMGI
  1. Johnson & Johnson NYSE:JNJ
1. AltQuest Medical Product Distribution Index
  1. Danaher Corp. NYSE:DHR
  1. Stryker Corporation NYSE:SYK
  1. McKesson Corporation NYSE:MCK
  1. Cardinal Health, Inc. NYSE:CAH
  1. AmerisourceBergen Corporation NYSE:ABC
  1. Henry Schein, Inc. NasdaqGS:HSIC
  1. Patterson Companies, Inc. NasdaqGS:PDCO
  1. Owens & Minor Inc. NYSE:OMI
  1. PharMerica Corporation NYSE:PMC
  1. Aceto Corp. NASDAQGS:ACET
1. AltQuest Specialty Providers Index
  1. Fresenius Medical Care AG & Co… NYSE:FMS
  1. DaVita HealthCare Partners Inc. NYSE:DVA
  1. MEDNAX, Inc. NYSE:MD
  1. AmSurg Corp. NasdaqGS:AMSG
  1. HEALTHSOUTH Corp. NYSE:HLS
  1. Surgical Care Affiliates, Inc. NasdaqGS:SCAI
  1. American Renal Associates Holdings, NYSE:ARA
  1. Adeptus Health Inc. NYSE:ADPT
  1. LHC Group, Inc. NasdaqGS:LHCG
  1. AAC Holdings, Inc. NYSE:AAC
1. AltQuest Pharma Services Index
  1. CVS Health Corporation NYSE:CVS
  1. Express Scripts Holding Company NASDAQGS:ESRX
  1. Perrigo Company plc NYSE:PRGO
  1. Allscripts Healthcare Solutions, Inc. NasdaqGS:MDRX
  1. Magellan Health, Inc. NasdaqGS:MGLN
1. AltQuest Practice Management Index
  1. WellCare Health Plans, Inc. NYSE:WCG
  1. HealthEquity, Inc. NasdaqGS:HQY
  1. Team Health Holdings, Inc. NYSE:TMH
1. AltQuest Provider Services Index
  1. Cerner Corporation NasdaqGS:CERN
  1. Healthcare Services Group Inc. NasdaqGS:HCSG
  1. HMS Holdings Corp. NasdaqGS:HMSY
  1. The Advisory Board Company NasdaqGS:ABCO
  1. Omnicell, Inc. NasdaqGS:OMCL
  1. Evolent Health, Inc. NYSE:EVH
  1. Providence Service Corp. NasdaqGS:PRSC
1. AltQuest Long Term & Behavioral Care Index
  1. National HealthCare Corporation AMEX:NHC
  1. The Ensign Group, Inc. NasdaqGS:ENSG
  1. Civitas Solutions, Inc. NYSE:CIVI
  1. Acadia Healthcare Company, Inc. NasdaqGS:ACHC
  1. SunLink Health Systems Inc. AMEX:SSY
  1. AAC Holdings, Inc. NYSE:AAC

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

Margins

Debt to Equity

Multiples

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.

How to Advise on Strategic Alternatives?