Many entrepreneurs and management teams are faced with the decision of whether to engage an investment banking (financial advisory) firm when trying to raise capital or sell their entity.
Many of the same goals can be accomplished without an investment bank, but a dedicated, disciplined approach should never be sacrificed. These delicate processes require sincere commitment. Either one could be the most important action a business owner or manager takes.
Here are six things to consider and what you should expect.
* Managing the process. Raising capital and/or selling a business takes time. Both should be approached with a well-thought-out strategic plan. The process should include preparing a complete business plan, including narrative and financials, and preparing all collateral materials, including marketing brochures, sales pipeline information and management team bios.
* Confidentiality. Always be aware of the decision-making process and the accessibility of important information. Consider the effect that confidentiality policies may have on management, employees, customers and vendors. This sensitive area should always be carefully reviewed, and a plan must be in place before embarking on the process.
* Confidentiality and nondisclosure agreements. When working with potential buyers/investors, be aware that many institutional private equity firms do not sign confidentiality and nondisclosure agreements. If they did, they would be signing hundreds (sometimes thousands) each year, and could not possibly keep track all of the information.
Private equity firms are not in the business of stealing ideas from entrepreneurs and starting their own companies to compete with yours. They are in the business of investing and buying companies. If, however, discussions progress with a potential buyer or investor and sensitive information is going to be divulged, then it may be appropriate to broach the subject.
* Marketing the transaction. Communicating efficiently and effectively and tracking the communication flow is very important. Transactions take on a life of their own, and you should be well-prepared for managing the process.
The tracking, managing and coordinating of interested and noninterested buyers/investors is critical to a transaction, and one central body is essential. Third-party financial advisers are excellent in providing the necessary process. Quite often, investors/buyers welcome and encourage a third party to be a communication buffer.
* Assisting and supporting the financing process. Qualifying interested investors/buyers is an important step in the process. No one wants to waste time and resources with unqualified “tire kickers.” Third-party advisers assist in screening and expedite the process.
Assuming sufficient investor/buyer interest, an investment bank will assist in coordinating activities including the inflow of term sheets and investment/purchase terms, Letters of intent (LOI), due diligence activities, coordinating and setting up a “data room,” negotiating, structuring and closing a mutually beneficial transaction.
* Providing ongoing services. As part of a long-term commitment and relationship, an investment bank should be able to assist with ongoing financial services. Because of the nature of the process, the investment bank will learn a great deal about your business and its activities, opening the door to nurturing and maintaining a solid sounding board relationship.
Of great importance, regardless of whom you choose to market your transaction (internally or externally), remain the essential factors to a qualified buyer/investor. These factors include the quality of the management team and their business and strategic decisions, past financial and operational performance, the product and/or service, defensible market positions and executing the strategic plan going forward.
John Bintz is founder and president of Apple Tree Investments Inc., an investment bank dedicated to middle-market transactions. The firm raises growth equity capital, sells middle-market businesses and assists entities with strategic business planning. Reach him at (312) 243-9694 or [email protected].
