Wealth Management

Voted #6 on Top 100 Family Business influencer on Wealth, Legacy, Finance and Investments: Jacoline Loewen My Amazon Authors' page Twitter:@ jacolineloewen Linkedin: Jacoline Loewen Profile

July 27, 2010

Private Equity Funds may phone you, but are you really prepared?

You may get a phone call from private equity, but be aware that only 5% of companies contacted actually get an offer. Shocking as that might be, owner-operators go to private equity thinking they are prepared and then are bitter that their time was wasted.
As a financial advisor to owner-operators, our team is constantly discussing how to show our value-add to potential clients. We help owners access fantastic private equity partners, get their valuation higher than they could on their own and then help them through the five years of partnership. 
Owner operators are getting phone calls from private equity funds and not preparing themselves properly. They think they can just show up with out knowing how a Private Equity partner works, what they want and their hot buttons. 

Here's a good article in the Globe and Mail about selling a company that I thought you may find interesting and thanks to Winnie Chou. She picked up this article and has some excellent points. Winnie says,
The interesting part is from the initial prospecting, the Riverside fund sent an introductory letter to 30% of the total list of companies and from that pool, the fund sent an LOI to less than 5% of the companies.
So even though a company may feel like they are being targeted by a big fund, the chances of an actual deal occurring are slim and often, the business owner will not receive an offer without knowing what they did wrong in the meeting.

July 23, 2010

The management of new costs

There are two concepts not in business owners' heads:
1. Hiring someone new - unless you are OpenText who needs 2,000 new people right now. The American government has introduced changes to business rules, taxes and employee costs. These will need to be digested for a while before owners get optimistic and expand again.
2. Growth. Expanding is not in the plans of many Canadian business owners. In fact, many are reducing their footprint, closing their American manufacturing plants and sticking to Canada. The costs of doing business in America are going up.
I listen to experts and advisors who rattle off these phrases of job creation and growth. Yet, these experts have not been owners themselves. they have not had the stress of meeting payroll and surviving through this past few years.
Having government change your profit and loss ratio by bringing a sudden new law with arbitrary regulations, making your business costs that much more unpredictable, shuts down business joy. For example, Dalton McGuinty's family day holiday was given by the Ontario government the day after he won his elvetion. For business owners, that gift to millions of happy employees meant a loss for 600,000 Ontario business owners. Many of them did not take home a paycheck that month.

July 22, 2010

The Difference with Entrepreneurs

A Rotman professor of Finance called me last week to speak about running a financial clinic for their business owner program. I hung up the phone understanding why Rotman is such a strong education institution.
The professor told me that they knew that the content of the MBA finance courses would not match with the needs for earlier stage companies - the clinic "students" would all have revenues under $10 million. That delighted me to hear her views as it is easy to clump small business into the same box as even mid-sized companies.
As with every other element of business, finance is a mathematical fit to size of revenues. Skill set requirements change for owners as the business grows. MBA finance is more of a fit for the larger corporates and this Rotman professor wanted her class to get their skill requirements matched, not have MBA cut down. What a concept, a university actually listening to their clients and working hard to deliver the best program.
The different attitude towards business by business owners versus professional CEOs,  reminded me of a favourite quote from a terrific book called The Philosophy of Money by George Simmel.
You do not make great wealth by following the safe paths and the rest of the herd. Simmel says,
"We burn our bridges and step into the mist."
That does sum up the adventure of private equity for business owners and te best private equity experts (not the banker types). You can imagine being back in Roman times, heading off for new fortunes, and it has a good ring of Beowolf to it.

What happens when the Term Sheet has a Put that was not in the LOI?

A great deal can change between the letter of intent (LOI) and the term sheet. Business owners who try to be the expert and manage the relationship with private equity by themselves will discover two things.
1. The private equity team may change terms more if they think you do not have an expert by your side to point out changes.
2. The due diligence charges will become a huge issue if you do not close the deal after the LOI. Clarify who is responsible for picking up the tab. If you have an excellent financial advisor, they should have made sure 75% of due diligence was already done.
Here is a story where the business owner thought they should do the private equity themselves.
A business owner asked me to drop by and as I walked along the street to his offices, enjoying the summer heat, I assumed it was more for social reasons. He did speak about his children's issues but quickly moved the conversation to his business and money. He had been successful at getting the banks to give loans and he told me he now had $10M of his own tied up in the company. He was approaching fifty and did not see the need to sell. He was offered $30M by a private equity group, but turned it away. He also had several Angels wanting to invest, he says.
Last year, a well known private equity group approached him and wanted to invest $5M. He retained a lawyer from a top Bay Street firm to assist. He also hired a finance person to do the analytical work. He tells me that he was fine with the LOI and then the due diligence began. He says it took him a great deal of time and effort but seemed to be worth it.
When the final term sheet arrived, he read that it had a Put, which had not shown up on the LOI. He was shocked that this was now being put on the table and did not want to sign a deal.
He said that his financial person wanted her to sign, but the owner believed it was due to the nature of the finance person's fees. The finance expert was paid the lion’s share of fees only if the deal closed. The owner thought that affected his judgement, and did not trust him to act in his interests. In addition, the owner believed the financial advisor would put his financial needs before hers. So he did not believe he had unbiased expert help.
After all that work, he turned down the PE fund. This respectable private equity group have turned around and decided to sue for $120,000 to cover their costs of due diligence. The Bay Street lawyer says he never saw that coming. He did not have it covered either in the paper work.
It was a surprise to me too. First of all, deciding who pays for the due diligence seems to me to be what gets covered in Law 101, and this lawyer was a top guy charging big fees. If this owner had read the last chapter of Money Magnet, that Bear Trap was laid out clearly, along with his other issues. The lawyer was obviously not experienced in private equity deals. Remember to ASK for past experience. I wish I had a dollar for every deal I have seen papered up by lawyers at great expense, only to have it collapse leaving nothing for the owner. The lawyer then is paid again to clean up the wreckage. Great business, law.
This owner had used the finance expert as a book keeper. If you have an agent of status, the private equity group is not going to play these games as they know they will never see another deal again. Sure, the valuation can drop by 15% from start to end but again, that PE group will become a pariah and EMDs learn pretty quickly who plays these games.
As for transaction fees versus pay for hours worked, raising capital is really tough. I would rather have someone who had the same risk to push the deal along.

July 21, 2010

2 Reasons to Use a Financial Advisor

There are two reasons you use a great financial intermediary to find you capital and private equity partners.
1. The private equity guys you want to meet are not the ones who have hired a lackey to cold call your office.
2. The best private equity guys only meet with company owners with a personal connection to them. Get the advisor with weighty personal connections.

Here is a great article by Scott Kirsner explaining these two points in detail:

 Bob Davoli likes to position himself as an entrepreneur who just happens to be making investments on behalf of a venture capital firm.
“Having been a CEO, I don’t want some VC calling me up every week and saying, ‘Let’s have a cup of coffee.’ So I don’t micromanage,’’ he says. His approach is to either “let the guy run the company’’ (all but one of his chief executives are guys); identify a problem and work together to fix it; “or you fire him.’’
Peter Bell, who was the founder and chief executive at StorageNetworks, sought Davoli’s advice when he became a venture capitalist.
“If the guy isn’t delivering, or you no longer support the strategy that he has laid out, you’ve probably got to replace the guy,’’ Bell recalls Davoli telling him.
Davoli says he doesn’t read trade publications or analyst reports. He doesn’t share advice or investment interests on a blog or via Twitter.
He doesn’t speak on panels or look at business plans e-mailed to Sigma. “We’re very relationship-driven,’’ he says, meaning that most of the entrepreneurs he meets are introduced to him by people he already knows.
When asked whether that strategy might mean that he’d miss the next Facebook, a company started by a young entrepreneur not already connected to the start-up scene, Davoli acknowledges that it would. “But hopefully, when the VPs from successful companies go to start their own companies, we hope they come to us,’’ he says.
At GlassHouse, chief executive Shirman says he didn’t feel pressured by Davoli to take the company public in 2007 or this year. “His position is, if the markets are hostile and the timing isn’t right, you just wait,’’ Shirman says.
Davoli is “the anti-VC VC,’’ Shirman continues. “He doesn’t have a lot of respect for VCs who aren’t independent thinkers, or who are numbers jockeys. He enjoys building and growing companies.’’
Davoli is happy to ride on his reputation; some might characterize him as tough, but he says he’s fair and that the only time he gets “really vicious’’ is when someone has lied to him.
“If you have too many bad scorecards, guess what?’’ he says. “The new entrepreneurs aren’t going to come to you for money.’’
Scott Kirsner can be reached at kirsner@pobox.com.