reply
by a searcher
7yrs ago
from Babson College
in Boston, MA, USA
Sachiv,
You bring up a real issue. It's definitely important to have a solid relationship with equity providers before you need to ask them to commit money. One solution for a self-funded searcher is to build/maintain relationships with investors as you go along. This can also be done with senior debt lenders, CPA's and M&A lawyers. If I've learned anything, its been that you want to have options when you want to close a deal. Otherwise you'll rip yourself apart going in too many directions at once. That means not being dependent on any single source of resources (Equity, Debt, CPA's, Lawyers, etc.). I believe in building relationships with multiple individuals in each category, so....when the time comes, you can decide for yourself which other people are the best fit for both YOU and your DEAL. Some debt providers have comfort areas, and so do equity providers. Clearly if you're buying a manufacturing business, you'll want a CPA who's done a QoE on more than just distribution companies. However, what I describe sounds like a lot of work, so here's a practical approach.
1) Reach out to CPA's and Lawyers that serve the industries and/or geographies you'll search within. Offer them a "River Guide" arrangement, and clearly the possibility of retaining their services after the sale. You may want to speak with them about supporting you during your due diligence, however in many cases, there will likely be a conflict of interest. So the incentive for them is the finder's fee and the opportunity for a continuing business relationship. If one of these CPA's or Lawyers brings you a deal, you should use another professional to assist in buying the business.
2) Do the same with debt providers. Begin with those in your industry/geography. You'll want to be able to shop around. Its as much a personality fit as it is anything else with many loan officers. Some advertise providing one type of loan on their website, but in reality, don't enjoy doing those types of loans. Build a long list, and sign as many up as river guides as you can.
3) Lastly, do this with investors. Investors can also help with deal flow, and could still bring you a deal for a finders fee that they may or may not want to invest in. You can put these investors on a mailing list, and update them regularly just like a funded searcher. Over time, they'll be more comfortable. If you need to offer the right of first refusal for them to invest, that fine, but they should be supporting you in return by certifying that you have the "means to invest" when a broker/seller needs to see a bank statement to move forward.
Remember, funded searcher MUST update search equity providers regularly. Self-Funded search CAN/SHOULD update acquisition equity providers regularly also. Most investors won't treat your deal flow emails as spam....and if you're using your CRM right, you can see which investors open your updates and which ones don't. When the time comes to offer the opportunity to invest, just send the OM to those who read your email updates. They'll be the "smart money" you're looking for in the end.
Lastly, don't forget to consider offering your seller a small equity stake if it feels right for both of you, as part of your capital stack. Seller equity should come at a lower cost than outside equity. Many sellers have a minimum cash dollar figure then need in their account at closing (they have bills, mortgages, Florida condo projects, and kids in college too). Figure out what this minimum is, and work from there. Once the Seller is getting his/her minimum cash on closing, then most sellers are interested in managing the rest of the sale price to minimize taxes over multiple years.
