A VC in Vacationland

One of the most crucial decisions a founder can make is finding the right advisors when it is time to raise new capital or sell their business. Here are a few things I’ve learned over the last three decades about choosing the right IB partner:

1. Network, network, network—you want the largest exposure to make sure you cast the widest net, not just ones the IB knows best. IBs owe a lot of ‘favors’ to companies they deal with, and it is not unusual for them to steer deals to ‘friends’, even if the deal is not best for the acquiree. We had that happen to us when we outbid the final acquiror and were the better fit, but a smaller IB chosen by the acquiree had to pay off a ‘debt’ to the eventual acquiror. It cost the equity holders a lot of forgone money upfront and growth prospects going forward.
2. Team— You will get to speak with the senior partners a lot as part of the courting process, and they are critical for corralling the right acquirors. Most of the hard work on prepping the data room and presentations falls to junior staff. On the deal one of my partners is working on, we have a conference room full of Goldman associates dedicated to the whole process. It is a multi-billion-dollar deal, but that is not an outlandish number. Be sure you can interview the associates who will be working on your deal and make sure they have industry experience, not just generic M&A experience.
3. Process Management—someone, perhaps you in particular, will have to ride herd over the deal as it progresses, given that your C team is running the business. This is where deals are won or lost, not in the networking or team performance, but in the execution of the process. We had a deal go south earlier this year when some undisclosed compensation owed to employees over the next five years was revealed late in the negotiations, reducing the EBITDA forecasts—not significantly, but it gave the buyers pause and eventually pass.
4. Valuation measures—multiples of EBITDA or ARR? This area is becoming particularly tricky with AI resetting industry pricing metrics. You have already done a bunch of traditional pricing model valuations, but it would be useful to speak with your sales team and other industry experts to see how solution pricing may be impacting how companies may be valued going forward. Traditional SAAS pricing is moving towards transaction and performance-based pricing thanks to AI. This a good Q to ask any IBs you are interviewing to see if they understand the emerging landscape.
5. Sweet spot for M&A deals—IBs will brag about all their deals. You want to know how they did on deals that are very similar to yours—size of company, financial success, industry specific software, etc. You want them to narrow down their successes to a small set of specific deals that you can then reference. Ask about failures as well and find out what went wrong in these deals. This can provide some red flags to keep in mind during your deal process.

For those who think using an IB is a waste of money, think again. Substantial amounts of work goes into selling a company. You and your executive team need to keep your company running at a high level during the process. Deciding to forgo paying 3 to 5% of the purchase price for an IB can cost you a lot more, including buyers dropping out, if deadlines are not met, data is incomplete, or other unforeseen complications.