The world of entrepreneurial funding is a bit murky and even somewhat nebulous for most of us. We know there are people willing to give money to start-up companies, and we certainly know of start-ups who could use the money! Beyond that….. it can be a bit fuzzy.
I had the rewarding opportunity to interview Mark Gaeto, a Managing Director at Falcon Capital Partners, LLC. (http://www.falconllc.com/) to see if I could get some clarity on this subject. Mark and I have known each other for quite a few years, so the interview process was easy and informative.
Falcon Capital, LLC, in their own words, is “a leading transaction advisory firm offering merger & acquisition advisory, strategic advisory, and capital financing services to middle- and lower middle-market companies”. This means that they can be brought into a company at any point: before a sale begins for strategic assistance, offering guidance and assistance during a sale, and also be the party who can bring the money to the sale. Of course, they are also in business themselves, and therefore need to generate their own revenues and profits. As Mark says:
I create revenue by selling client engagements. To do this I have to build a rich and recurring book of business using a variety of approaches and tools. I can only succeed if I bring successful outcomes to my clients by providing a structured and fact-based approach to their specific situation.
As we’re reading in our text (Amis & Stevenson, 2001), finding deals is not necessarily all that easy. It is a numbers game, as well as a quality game, so there is a goal of finding multiple deals in order to sift to find the good deals. Falcon Capital typically completes 20 years a deal, with Mark alone doing anywhere from 2 – 6 a year.
Creating revenue is about networking, meeting and then building relationships with business owners and entrepreneurs. I need to gain their attention and then trust. This takes time and patience is required. Once done, I can offer services to help the business owner exit to a strategic buyer or assist his firm with acquiring a company, or help him or her grow their firm via a growth plan that requires expansion capital.
Karen, I started my practice from scratch. Building a book of business is all about selling and selling is a numbers game. There has to be lots of activity. However it has to be well thought out and planned. There is a lot of heavy lifting that needs to happen. Starting out in this business was very difficult and it takes time. I get most of my clients by networking at venues where I’m known or have qualifications. Because I have a successful track record, I get referrals.
I work closely with estate attorneys, CPA firms and wealth management companies. I do a great deal of networking and attend trade shows and conferences. For example, I just returned from SAP’s Sapphire event. I will probably attend Oracle’s and Salesforce.com’s user events this fall. Of course, one has to have the requisite website, social media memberships and provide research and reports via the web. Let me say it again. Selling is a numbers game and it requires activities. You need to get eye-to-eye with owners, influencers, decision makers.
Yowsa! So much for my view of business being done at country clubs and during golf games. Just kidding, Mark… And even though the economy has and still seems to be taking a beating, for Mark, he and his company have been noticing a bit of an uptick in both business volume and the sales prices.
2008-2009 were very, very tough years. Our advice to owners back then was “don’t sell”. A hard thing to say when you make money when owners do sell! We did so because it was the right advice. The valuations were low and buyers were too cheap with their offers. The market just wasn’t the best. Some owners did sell for various reasons and some fair deals got done. No one was raising money. In 2010 we started to grow again. 2011 was a better year and 2012 should be a very respectable one. This is a good year to prepare for an exit or funding.
And where is Mark’s sweet spot in the business world? As he focuses more on the business sal , with 60-70% of his engagements on what he calls ‘sell-side engagements’ or helping business owners sell their firms, he is usually involved with mature companies.
Funding engagements are mainly for established firms with at least 3 Million in EBITDA [earnings before interest, taxes, depreciation and amortization]. We do some funding for early stage firms – ones that have some level of revenue (at least 2 million in revenue). We don’t assist early stage start-ups and we do not invest in them. We are more than happy to meet with them and provide them with guidance.
Of course, while this is all about business, there are people involved, and people who have a large invested interest in making this work to their own advantage. So what has Mark seen in transactions?
It can get very emotional and a lot can go wrong in any deal making. You just hope that you’ve done your homework and have the facts so you can properly represent the transaction to each party (seller and buyer).
Negotiations are negotiations and we love it, but I don’t like it when people outright lie.
Follow-on questions weren’t really an option to that last statement, but it seems like when Mark’s done, he may be able to write a book on ‘what people will say in order to make a lot of money’!
And of course, it always helps the transaction when the owners are knowledgeable and aware of how they make their money, and where their business value is. The following discussion focuses on how business owners can ensure the best valuation for their firm and attract key resources; both companies like Mark’s as well as potential investors and / or buyers.
Owners and entrepreneurs should seek advice early. Thinking they can sell their firm, buy one, or raise money themselves is in most cases (not all) a mistake and usually a big one. Also, and this may sound odd, but there are some owners that don’t fully understand how they make money. They don’t understand their business model for generating operating income and profit.
They need to be able to define the company/business in a single declarative sentence or two.
They need to be able to accurately describe the pain of the customer that their service or solution addresses/solves.
Owners need to really understand their vision or where they are going. The vision statement should be very succinct. It needs to be based upon the facts of the market and not on some crazy thought or ambition. They need to understand what 2-3 initiatives drive the vision. The initiatives needs to have targets and metrics (and budgets). They need to understand how to get things done. They need to know how their firm is different from competing offerings. They need to understand how their products impact a potential client. Why should a potential customer do business with your firm and what is in it for them?
References
Amis, D., & Stevenson, H. (2001). Winning angels. Great Britian: Pearson Education Ltd.
As a bonus feature, following is a transcript of an interview Mark Gaeto had with Bruce Hadley, the editor of SoftwareCEO.com.
- What is the first step a business owner should do if selling a business?
- Plan: An independent Valuation. A business vision and plan – the company history and narrative?
- How do you make the business more valuable?
- Your best route to high valuations is growth- a growth plan around revenue and margin capture at rates greater than 10%. Other issues are how good is the management team, how focused is the firm on a revenue model or is ti just opportunistic, customer diversification, depth of relationship with customers (your contracts), IP, Patents, market size for products and industry trends a firm is exploiting, competition
- How does timing affect the sales of a business
- Personal – Retirement is the number one reasons private business owners sell. Illness, burnout, change- usually wanting to do something else
- Company – Counter intuitive. Why should I sell if everything is going great? This is probably the best time to sell. Valuation premiums are for the taking in this situation. Far too often owners sell when things are not going well. Most people don’t want to buy turnarounds. You want to sell when things are on the upswing – a history of growth behind you and solid projections ahead of you.
- Market – This is out of an owner’s control. Examples: An industry where there is growth and consolidation. Competitors are seeking to acquire you. Consolidation trends last 2-4 years. Low interest rates. Low capital gains tax rates.
- What are the common mistakes?
- Ownership of IP [intellectual property]: Making sure there is clear ownership to IP. Make sure all employees/independent contractors have signed over all rights to IP. Must be documented before a process starts.
- Disclosing too much information too soon in the process. Unfortunately many “strategic acquirers” use the M&A process to learn market information. Confidentiality Agreements help but sellers should remember beware of disclosing the “heart” of their products too early in discussions.
- Getting into a cycle with and disclosing information to the first person who shows interest. Not being in a structured process.
- Not knowing how to position their IP. It’s all about the IP (and the market) with tech firms and there are ways to position. You really need a banker who understands how to do this and not just rely on financial numbers.
- Not negotiating the key terms of the deal in the Letter of Intent…
- Not fully disclosing…. Material items and events need to be disclosed. For example I had a client who hid the fact that he was being sued by a former client for alleged IP theft. I had another that “forgot” to disclose that a former partner owned 50% of the business.
- I can do it myself or my VC partner can do this. Many sellers think they can do things on their own – without the help of a solid set of advisors. Linked to point 3 above.
- Failure to understand what a real sell-side process is and accomplishes. They don’t get that it’s a structured sales process with many moving parts, and the objective of a structured sales process is to create a competitive dynamic. The sale process has a number of phases, tasks and protocols. Knowing how to manage the process and adjust (slowdown or speed up the process) it when necessary is very important. Most entrepreneurs don’t have the skill set or experience to work buyers and play buyers off of each other…
- Not using an experienced deal attorney or using a generalist versus a specialist. Deal attorneys are more expensive, but they are worth the fees and they can get a deal done with better terms and faster.
- Not doing their homework around valuations. For young technology firms valuations get tricky and sellers just can’t simply point to industry stats. You need to triangulate a handful of different methods using specific company data and understanding the dynamics of the specific sub-sector they are in. This goes both ways, some owners over estimate and some under estimate valuation. Beauty is in the eyes of the buyer and this is where a seller could get a premium based upon well understood (documented and mapped) synergies it can bring to specific buyer… We can discuss.
- Entering into agreements that have long term and impact to the buyer and materially impacts the deal … Doing this while in a sell-side cycle…
- Thinking a deal is done before an agreement is signed and monies are transferred.
- Thinking they can save money by not using advisors. Advisors create additional wealth.
- Not getting good tax and wealth management advice before they exit. Not understanding the tax implications of the deal and the value an advisor can bring by looking at different payment options that affect the outcome. Founders or owners do not often understand what they net out of the sale.
- Not planning for the exit – putting together an actual project plan several months before if possible. If an owner has the opportunity to think ahead… their best exit plan is a growth plan with some tweaks around documenting and professionalizing parts of the business. This involves really understanding ones revenue and profit model (how do you make money and generate cash flow and profits). Buyers pay premiums for documented historical revenue growth and solid projections.
- In a VC or PE deal, understanding and building a profile around what type of financial partner you seek and what role a “partner” to play.
- Not understanding the value their business or solutions bring to their clients/market…and not being able to articulate it to buyers. Many firms have poor value propositions and messaging …
