US-based entrepreneur-blogger Fabrice Grinda strongly recommends that any entrepreneur – even if he/she is a “former investment banker or someone with significant M&A experience” – should use a banker when selling a business. (I think this applies when raising Private Equity/Venture Capital as well.)
From Fabrice’s post:
(Avoiding conflicts with the buyer) is the single most important reason to use bankers. Negotiating a sale of a company is one point in time at which your interests are not aligned with those of the buyer. It is very easy for the negotiation to turn acrimonious.
The sale of the company is not the end game, but only one step in its development. You will have to work with the buyer for the foreseeable future and must thus maintain a good relationship with him.
Whether negotiating the price or the details of the stock purchase agreement (SPA – representation and warranties, etc.), I always let my lawyer and bankers take the lead in the discussions. This way I can blame everything on them – they are greedy and difficult while I am the reasonable guy willing to make compromises.
Speaking from the context of a US-based VC, Brad Feld thinks entrepreneurs should use an agent if they raising late-stage capital, but go direct if they are raising funds for a start-up.
From Brad’s post:
Many early stage VCs – especially those that are in saturated geographies and see a lot of deal flow – don’t pay much attention to deals that are promoted by an “investment agent.” I know a number of folks who simply “hit delete” on an email (the virtual equivalent to tossing the physical PPM – the document most agents insist on putting together – in the trash.) In the early stages, the entrepreneur is by far the best fundraiser for his company and there is a knee jerk negative reaction by many VCs against early stage deals that “require” an agent. At the early stage, an entrepreneur is much better served by finding an advisor (or set of advisors) or angel investor that has good VC connections and fundraising experience who can get actively involved in the company as advisor, board member, consultant, or even chairman.
Later stage companies and larger capital raises are a different story. The universe of later stage investors is very dynamic – consisting of corporate (strategic) investors, high net worth individuals, private equity firms, and hedge funds – in addition to later stage VC firms. Many firms enter and exit the market regularly for a variety of reasons (e.g. a number of hedge funds have recently started doing what traditionally look like late stage / mezzanine VC deals). An agent who is active at raising later stage capital will typically have some relationships with folks currently in the market, can run the drill of identifying the primary suspects for the entrepreneur, and can help manage what is typically a more complicated and less structured financing process (e.g. there often isn’t a clear lead investor in a later stage deal.)
- Tall Tales told by Grandmas and Venture Capitalists - February 7, 2014
- If only Abhimanyu knew ‘The Art of The Exit’ as well… - January 28, 2014
- “Accelerators should not try and be all things to all people” - March 28, 2013
There is an interesting contrarian view on this topic at
http://bostonvcblog.typepad.com/vc/2006/10/index.html
This is IDG Venture’s Jeff Bussgang’s post
WE MANUFACTURER OF PLANT & MACHINERY FOR CRUDE EDIBLE OIL REFINING,WE ARE PLANING TO START OUR OWN REFINERY FOR CRUDE EDIBLE OIL,WE HAD CHOOSEN THE PLACE FOR REFINERY IN TAX EXMEPTION STATE HIMACHAL PRADESH IN INDIA. WE REQUIREE INVESTOR WHO CAN INVEST US$9600000=00. AS WE HAD NOT ANY IMMOVABLE PROPERTY TO GET LOAN FROM BANKERS,ONLY HAVING A GOOD KNOWLEDGE AND EXPERIENCE.(www.tcepl.in)
THANKS
P.K.RANA
Update: IDG Venture’s Jeff Bussgang has more on this topic here
I agree with Brad, early stage and very early stage does not require an Investment banker. What you need a is someone to pitch your plan to a few VCs…
On the M&A side if you are a large deal or are not connected then you should use a banker otherwise I don’t see the value.
You will absolutely need lawyers and a good CFO (could be a rented CFO for the deal). The lawyers can serve as the bad cop, as can your CFO (he will most likely not survive the deal in any case) and the final bad cop is your board :).
You would need to arm yourself with comparables and get to know the target companies. It is at the end of the day a sale and has many similar characteristics. It is important to remember that the acquiring company (people) must like you as people. They must want (or at least not resent) you getting rich.
On the VC side – I think late stage there is a good reason to get someone who knows the landscape.
On the early stage side, if you are a first time entrepreneur, you should get someone to help you navigate the waters. Ideally get a power angel or an advisor, who has been a founder of a company with a successful exit, who will help you with his relationships and experience at walking the thin line between fear and greed.
Even if you have done it before it is still a good idea to have someone help refine your strategy. Having someone more objective than you (as a founder could or should be), who is a hands on sounding board will be very useful. Someone who gives you high level advice is not very useful. They should be able to spend time reworking your slides, numbers, figuring out information is required to get the investor greedy and what could push them into fear and so on. You have to pick carefully.
If you do have an advisor, the advisor should stay in the background as a matchmaker and strategist and should not overshadow you. You as the entrepreneur should still be the one dealing with the VC from first to last meeting and the one presenting. Else you are not the CEO.