Three years ago I received a phone call from the owner of a leading Austrian retailing company. He was a client of mine.
“I’ve decided I’m not going to sell the company just yet,” he said. “I want to take the company from a €70million turnover business to €120million within the next few years. And I’m confident I can do it.”
Suddenly, the volume dial was turned down. The rest of the conversation became a blur. I couldn’t pay attention anymore. I was left flabbergasted. Utterly flabbergasted.
After I hung up the phone, I took a deep breath and put my face in my hands. All that time spent on this deal. For nothing.
I stood up and went for a long walk in order to digest what had just happened. It was that or downing a bottle of vodka. And I seldom drink so it would have probably killed me.
6 months earlier
One morning I received a call from Peter, a successful Austrian businessman I knew. The two of us had met the year before while I was conducting due diligence for a Family Office looking to invest into the company Peter served as CEO. Though the family I was advising didn’t end up investing, Peter and I hit it off and became friends.
“I’ve got a phenomenal investment opportunity and I think you can help,” said Peter.
“Let’s hear it.” I was always intrigued to hear about unique opportunities.
“I’m flying to London tonight. Let’s meet at Claridge’s Hotel tomorrow morning at 8 and discuss it over breakfast.”
“I’ve got a conference call at 8.”
“Is it critical?” Peter asked.
“Not really. But—”
I took that to mean it was a hot deal. So I rescheduled the conference call.
I arrived at the hotel at 8am sharp where I found Peter waiting for me in the foyer.
“Let’s eat. I’m starved,” he said.
We sat down, ordered breakfast and spent five minutes catching up on life, family and everything in between. Once that was done we moved on to business.
“It’s always a pleasure to see you Peter but why did I postpone my conference call?”
“For the best deal this year,” he said with an air of unquestionable confidence.
“My friend wants to sell his company and it’s a gem,” he said.
Peter went on to describe the business in detail. The more he spoke the more I was drawn in. Before he finished, he handed me some documents. “Here are the financials and a brief business plan.”
I took five minutes to skim the printouts. Great profile. The company had around €70m of Revenues, €7.5m EBITDA, lots of cash, was growing fast, no debt and possessed what appeared to be a good strategy for the next 5 years. It was the leader in its niche in Austria. I can definitely sell this. I knew several mid-market private equity firms who would jump at the opportunity.
“You sure the owner is selling?” I asked. I had to check.
“100%,” said Peter. “He’s ready and happens to be a very close friend. When he asked me whose help he should seek I told him he has to mandate you.”
Perfect. “When can I meet him?”
“Come to Austria next week.”
I flew out the following week and met with the owner.
In his early 50s, he was a heavy man with a physique that was testament to years spent siting behind a desk working away and eating junk food. Despite his apparent allergy to cardio, he’d built a respectable business.
My first day was spent in meetings with various members of the management.
On the second day, I was given a tour of the premises and taken to several of the retail outlets the company owned. It was imperative to get as much of a feel for the company as I could.
[Note: if you’re going to showcase an investment opportunity to investors then, beyond getting to know the business inside and out on paper, you should carry out an onsite visit in order to get a feel for the business firsthand. See the operations, the staff, the work environment. Think about it, if you’re trying to get an investor to acquire a business then you’ll make a stronger argument for why it is a compelling investment if you’ve seen it in person. Besides, there have been times investors have flown out to visit a potential investee company only to find empty offices. Though rare, scams do happen. Imagine if you had unknowingly pitched garbage to an important investor because you only went by the words and figures on a presentation. Your reputation would be destroyed. You’ve got to do your own due diligence. Always.]
Before returning to London, I discussed the particulars of how I how I’d work with the owner and we agreed to sign an agreement the following week.
As expected, the agreement was signed soon after. In it, I included the required monthly retainer and the success fee, which was a percentage of the capital raised. A potentially very nice success fee for yours truly.
I was supremely optimistic for I knew I could find a buyer/investor.
The first thing I did was to prepare an investment presentation and teaser. Luckily, that took little time as the company had already started the process and had a working copy I could improve and make more investor-friendly.
Next, I shortlisted about 25 investors I knew who had appetite for both the sector and the geography.
Within 2 weeks of initiating outreach I had 5 investors interested – they had signed Non-Disclosure Agreements and were ready to meet the owner of the company. All of the investors were reputable mid-market private equity firms. They were all ready to bite.
The 5 investors separately met with the owner of the company and soon after carried out preliminary due diligence, including a valuation of the company. Then, they each submitted non-binding letters of interest.
The owner reviewed the submissions and chose one private equity firm to proceed with.
At this point I was fairly confident I was going to close this deal. It was going too well not to and the company was an ideal target for private equity. Generally, nothing is certain till the deal is done – something I’ve learned the hard way – but everything appeared to be just right with this project.
The lead officer from the selected private equity firm couldn’t hide his enthusiasm. “We like this company and want to move ahead.” At the same time, he was cautious. “He’s definitely serious about selling, right?”
“Of course,” I said.
“I’ve gone to my investment committee and I’m pushing to make this happen. I’ll look bad if something changes.”
“Listen, the owner has put in over 15 years of his life into building this company and he just wants to sell, move to a tropical island and sip on coconut juice while staring at the beach.” Those were the words the owner had used when I first asked him why he was selling. “You’ve made him the best offer and he’s selected you.”
Getting closer to a transaction
Several members of the selected private equity firm flew over three more times to meet with the management.
They initiated further due diligence and were soon spending significant amount of time studying the proposition. One of the Big Four auditing companies was chosen to carry out full financial due diligence.
Meanwhile, I was wondering how I’d spend the success fee. The sum I’d receive for orchestrating the deal was over €650,000. A small 1-bedroom flat in Kensington. Or perhaps a spacious 2-bedroom apartment in Washington DC’s Dupont Circle. Choices.
I was walking in Berkeley Square when I got the call from the owner of the company. I answered the phone with a smile. “How are you?”
“Fine,” he said. “We need to stop the process.”
WTF? “One second,” I said, before quickly stepping into Pret A Manger and standing right next to the door where it was a little quiet. I must have misheard. “What did you say?”
Though the private equity firm was offering a sum he was originally happy with, the owner had changed his mind. He was not going to sell his business. Rather, he would grow it even bigger and maybe sell it in 3 to 5 years.
“Please let them know,” he said to me.
It was over and I was left high and dry.
After a chat with a more experienced friend of mine who’d structured many deals across the globe I learned I had made one fatal mistake. Leaving out a Break Fee clause, which could have stated that should the seller change his mind after an offer was made, in line with his previous demand, then he would have to pay me, say, €250,000.
“If you had put in that clause,” my friend told me, “he wouldn’t have played this game. The guy only wanted to know what investors would pay for his company and you helped him find out.”
From that day onward, I’ve always put in a Break Fee of 250,000 dollars, pounds or euros for these type of transactions. That way, next time a client would pull out of a deal after the process was well underway then I wouldn’t get too upset. I’d collect the money and say no hard feelings.
Advice to you
If someone asks you to help them pinpoint investors for a particular proposition then make sure to protect yourself in the event they change their mind.
However attractive an investment opportunity may be, raising capital takes a great deal of time and effort. And you put your reputation on the line when you do it. Cover yourself, whether it’s with a Break Fee or otherwise.
I should add, it took a lot of work for me to earn the lead investor’s trust back. My contact didn’t consider any investments I shared with him for several months. I had to visit him twice in Germany and build up that relationship again.
We learn from our mistakes :)
QUESTION FOR YOU: was there a time legal advice would have made all the difference for you?