Lessons From a Banker

“We don’t cover individual equities, no,” is what Investment Advisor editors always say to PR people who call us touting the hottest new stock. There are a number of other areas we don’t regularly cover per se, such as investment banking, for instance. After all, other media companies can do a much better job of specializing in those areas, and that is not what you expect or want from Investment Advisor. But I eagerly met recently with investment banker Nimi Natan (at the urging of a very perceptive public relations person, Jill Totenberg) because he specializes in something of interest to me, and you: putting together deals for smallish ($3 million to $20 million in annual EBITDA) business owners who want to sell their companies. We’ve heard plenty lately from advisors who have sold or merged their own firms (Editor-at-Large Bob Clark has written on this subject a fair amount, and does so again this month here). Everyone from custodians like Schwab to broker/dealers like First Allied Securities has put together programs to help their affiliated advisors sell or merge their practices. Moreover, a typical client of yours may very well have gained his wealth from founding and then building a business, and when they sell, “this is what wealth managers live for,” noted Natan, when that client goes from “illiquid to cash.”

So I asked Natan if it were true what the business development gurus say. Does a small business that builds enduring structures and consistent processes and human resources functions–and relies less on a charismatic founder and more on the whole team–become more valuable to a prospective buyer? The answer was yes, he said emphatically, particularly in any service-intensive industry, such as the financial advice biz. Our cover story this month by Managing Editor Bob Keane (here) focuses on a new breed of advisory firm that wholeheartedly embraces a business model, personified by COO Krishna Pendyala. But Natan, who most often represents sellers with an occasional foray into the buy side, had much more to say of interest to advisors. In his experience, buyers–financial or strategic–are much more sophisticated than sellers. Often, when a company owner wants to sell, the owner’s advisors–legal, accounting, even wealth managers–are not up to the task, unless they have significant prior experience. Moreover, it might not be in some of those advisors’ own interests for the client to sell: “When a company is sold, the investment advisor/wealth manager is going to grow their business; the accountant is going to lose a client.” There’s also plenty of money looking for a place to invest, despite the tightening credit arising from the subprime mess: “There are 6,000 private equity firms out there.” It takes time to match a buyer, too. “We try to value a [selling] company before we represent them,” in order to “set accurate expectations” for the seller.