Monday, October 22, 2012

Sometimes it is all about the deal




Over the years and working as an investment banker I periodically hear the dig about my profession, that all we care about is “the deal”. Implied in that statement is: that we only value the deal because that’s how we get paid and we only care about the fee not the client; the deal means only the financial components ($$$) and not the big picture; we care about the deal at the expense of what terms might be better for the client; and that we ignore common sense to focus on deal terms or fancy capital structures. And, very often the slur comes from either a private equity or venture capital investor (who is generally on the other side of our client in “the deal” and presumably cares about their own deal terms).

What a joke.

I’m not going to say it doesn’t happen. Investment bankers get paid if a deal closes and very often only then, beyond a token retainer and expenses. Thus, we’re incented to close a deal, and the more time we’ve sunk in to one the more we want to get paid and may even feel entitled (otherwise, we’ve worked really hard and not gotten paid). But the fee structure is like this for a reason: we are paid to make sure a deal happens thus the downside of not succeeding is built in. Any transaction, be it fundraising, a company sale, or a company purchase sucks an amazing amount of management time, taking them away from actively running the business. The company also must pay for lawyers, accountants and the like typically on either a per hour or retainer basis and it adds up fast. Our clients generally either really want the deal to close or they want us to keep someone at bay. Badly.

Raising money can be a make or break proposition for a company, as can a merger or sale. Our clients want investment bankers to work hard and rarely care if we’re eating, sleeping or missing holidays. I once spent two hours in an airport on a cell phone conference call with two small kids in tow on Christmas day. That deal closed (and made my two founder clients very rich).

And deal terms are crucial. Putting together a detailed assessment of possible bad deal terms in a blog post is impossible…there are just too many. One investment banker even wrote a book called Deals From Hell which details some especially unpleasant and never-ending deals. Exploding warrants (miss financial milestones and quickly lose control of your company), poorly drafted indemnifications (lose all) and imprecise earnouts (work hard; don’t get paid) are good example of why sometimes it is all about the deal. Then there is litigation, non-competes and a buyer or funder who goes bankrupt. If “the deal” isn’t well structured it will haunt you for years to come and drain your resources, if it closes.

A busted or bad deal can also taint a company’s reputation.

Sophisticated investors, such as venture capitalists or private equity investors, range from those who want a happy and incented management team to those who really just want to yank control of your company away, no matter what you’ve personally poured into it. At the very least, all want to get a good deal because that’s their job and their obligation to their own investors. The management teams of other companies often want to sell their vision and don’t want it cluttered with the realities of practical deal terms and downside projection. Investment bankers can make their objectives harder to attain by adding a sounding board, push back and insight.

All about the deal? Absolutely. No one should commit to a deal that isn’t in their best interest, especially when their life’s work is at stake. Every time I hear the dig about investment bankers being “all about the deal” I must admit that I inwardly smile and think “absolutely and that’s why our clients hire us”. Advisors look out for their clients’ interests and deliver the tough messages, aiming to strike the optimal deal (for their client).

And, “the deal” isn’t about money alone. Very often I’ve advised clients to chose a partner that offers less money but a better overall package. Cultural fit, relationships, synergies, reputation and long term vision are often better than the best cash package.

Any deal that succeeds in the long term benefits both sides. Deal terms matter, as does clarity and pre-thinking through what can go wrong before it does. A clear and well articulated contract means that both sides understand to what they’ve committed and what actions constitute performance. Sometimes it’s all about the deal? Do I even need to mention some high profile flops in which a poorly structured deal made headlines for years, costing money, jobs and reputation?

1 comment:

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