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Glossary

By MICHAEL CARTER

No CEO of a Fortune 1000 company would even think of raising capital, merging, selling or keep without his investment banker by his side. The owners of many privately held entrepreneurial companies don't know what an investment banker does, let alone utilize one to assist in a strategic corporate transaction.

A multi-talented, bootstrapping and tight fisted entrepreneur, faced with a once-in-a-lifetime transaction can be heard to ask: "Why do I need an investment banker?....l can handle this myself...perhaps with the help of my CPA and lawyer."

Qualified investment bankers enhance the probabilities and the economics of strategic transactions.

The implications of the term qualified in this context are enormous...a professional advisor can save a company significant capital and equity, reduce the transaction time and provide maximum flexibility. Conversely, poor representation can cost significant time and money and hurt the company's reputation.

Below is a summary of the advantages of using a qualified investment banker.

Providing Options
Prior to undertaking any transaction, the owners should articulate their business and personal objectives and what options they have in meeting those objectives. Key to any successful transaction is having options, or at least the appearance of options. Options increase the company's chance of realizing it's objectives by improving its leverage during the courting and negotiating phase. We often describe our business as that of providing viable options.

Structuring Transactions
Structuring transactions is like chess, most of us know how to play, but very few do it well. As with chess, the variables are extensive...including: valuation, amount, pricing, enhancements, earn-outs, guarantees, debt assumptions, seller financing, consulting contracts, carve-outs, hold-backs, etc. In ten years, we have never had a transaction finalized with the same structure as it was brought to us. In raising capital a common problem is balancing the optimal amount of cash to raise with the equity dilution. We advise our clients to focus on the structure of the transaction more than pricing.

Knowledge of the Capital Markets
The concept of "buying low and selling high" is both axiomatic and elusive, and indeed timing is critical. With every strategic transaction you will need a professional perspective on the status of the financial markets in order to properly price and structure a transaction. If one starts reading about peaks and valleys in the popular press it is too late. Markets that affect a business and impact value include: IPOs, private equity, bank financings, high yield bonds, M&A activity, LBOs, and asset backed securities, to name a few. Qualified investment bankers stay in tune with capital markets. In today's markets of plentiful capital it is even more important to understand who are the likely buyers/investors who will readily pay a significant premium for a company.

Relationships
Sources of private equity capital typically complete one transaction for every hundred situations they review. The process of seeking capital is as much about time as expertise. Key to saving time is to leverage off the investment banker's reputation and relationships. Qualified investment bankers:

• have solid deal flow, and know sources of capital who rely on them for initial screening
• have deep relationships with sources of capital, and
• have access to decision makers within a matter of days.

Saves Time
A "typical" corporate finance assignment takes us from 200 to 500 hours. Owners and their CFOs, consumed with running their business, simply do not have the time to focus on a strategic capital raise or in M&A transaction. If they try, day-to-day management inevitably suffers. The process of contacting buyers and investors is only one component of a significantly larger and more complex process...a fact which is often appreciated only when an investment banker is not utilized.

"Real world" valuations
Many entrepreneurs are unrealistic about the value of their companies...both high and low. Buyers and investors, before even reviewing the financing memorandums will often ask, "what is the valuation?". They simply do not want to waste time. The goal is to justify the valuation. Key to maximizing shareholder value is to understand how the financial community or "strategic" markets will value a company. Next is knowing who will pay the highest price.

Negotiating Ability
The entrepreneur, however skilled as a negotiator, is at a distinct disadvantage when selling out or raising capital...for two fundamental reasons: 1) he has never been there (it's usually a once in a business lifetime event) while buyers, investors and lenders make a living negotiating strategic transactions and 2) the entrepreneur is rarely objective (understandably bringing extraneous personal issues to the bargaining table).

 A qualified investment banker is a good listener, understands the buyer/investor's agenda and his language, and helps by providing experienced negotiating skills and an appreciation for the "art of the deal".

Planning
In anticipation of an equity infusion or an exit, investment bankers can play a critical role in preparing owner/managers. Companies routinely spend significant time and resources on their marketing plans with little commitment to financial and exit planning. This can take anywhere from a couple of weeks to one year. Dressing up the company depends on the state of affairs prior to a transaction, but to maximize shareholder value, a good dose of planning is definitely in order.

Presentation
A qualified investment banker will always prepare his client for the formal (and informal) presentations. Each meeting should have an agenda and the entrepreneur should know what to expect and what is expected. Meetings with acquirers and financing sources are critical venues for the parties to get to know one another.

Quality Advice
Accountants are experts in audits and taxes, lawyers are experts in statutes and regulation and commercial bankers specialize in granting credit. They are often trusted advisors for many companies and their families, but they are often not schooled in corporate finance. We typically act as quarterback, using such advisors in their areas of expertise, creating an effective team for the benefit of the client. If a company is considering using an intermediary other than a qualified investment banker, ask the following questions:

• What do they know about the most current financial instruments?
• Can they determine which structures provide maximum flexibility?
• Do they have sufficient market knowledge to negotiate the best transaction?
• Can they understand, interpret, adjust and articulate financial statements?
• Can they construct a financial model to determine the optimum capital structure?
• Do they know which venture capitalists specialize in the company's industry?
• Can they determine and rationalize the true value of the company?

If you hesitate in answering, you need an investment banker.  In summary, the introduction of a qualified investment banker legitimizes a transaction and gives it credibility, improves the pricing, and enhances the probability of a successful transaction being consummated in a timely fashion.