4 Frustrating Initial Approaches of Investment Bankers

So many opportunities. So little time.

This issue makes investment bankers and business brokers critical to effective M&A, especially in allowing us as investors to initially evaluate opportunities and determine whether to dive in and learn more. Teasers give us a quick snapshot. Books help us understand the situation. The investment banker herself provides great human insight into owners, operations, and opportunity.

At adventur.es, we’ve had the pleasure to work with many investment bankers that do an excellent job guiding momentum, keeping everyone organized, encouraging over-communication, and moving us all in the right direction as we evaluate an opportunity’s potential fit and, in a few cases, pursue it further.

However, we’ve also worked with investment bankers that, to put it frankly, have frustrated us to the point that we don’t want to pursue an opportunity — even a seemingly perfect fit — because the idea of continuing the process with them would require too much effort, patience, or both.

Here are four approaches we’ve categorized from these frustrating encounters that we would like to offer up. The majority of investment bankers and business brokers will likely read these and laugh, knowing they would never take such an approach. But, if you find yourself feeling offended, we hope you’ll consider it constructive feedback, which you can either take under consideration — or completely disregard.

1. The Paranoid Gatekeeper

Unfortunately, there are a lot of frauds or organizations-in-development in the mergers and acquisitions world. We understand that a certain amount of vetting is required for both sides to get comfortable with the idea of spending time and sharing detailed information. However, there’s vetting and then there’s acting as though you’re TSA and we’re on the No Fly List.

The paranoid gatekeeper is curtly demanding. He won’t take an introductory phone call, but insists on financial records. He doesn’t just inquire about current holdings, but wants to know financial and management details about each portfolio company and how his client would round things out, even though we have little-to-no information about the client at that point. These types of demands are frustrating because they require us to over-invest resources before knowing whether there’s a viable opportunity, and ultimately end in providing conjecture to satisfy a question for which we don’t have enough information to answer. And after all that, we then get a 12-page, one-sided nondisclosure agreement. Oh joy.

The ultimate paranoid gatekeeper frustration is when he demands to know how much dry powder we have to deploy, and what our initial valuation would be of his client, before he’ll answer any questions. Again, this line of questioning would require us to over invest time and information, and ultimately make up a valuation. We refuse to do this.

In these cases, we will happily provide enough evidence to satisfy questions of financial and operational credibility, usually in the forms of a bank letter, online references, and a general overview of our operations. If further demands are made, we drop out.

2. The Future-Is-All-That-Matters Pitcher

Since our firm doesn’t invest in turnarounds, most opportunities we review show a rosy picture of the future, with the growth curve continually pointing up and to the right. Sometimes, this future is evidence-based, but no forecast is ever guaranteed. Certain investment bankers, though, would argue otherwise.

The future-is-all-that-matters pitcher oftentimes doesn’t even know the financial history of the organization, its substantial operational components, its asset base, its client concentration makeup, and other, you know, pieces of hard, historical evidence of the company’s value. Why would they? All that matters is “the plan.”

This so-called plan is generally something the banker-consultant helped to create, which therefore cannot be flawed. Any questions about its risks are met with guarantees that all other possibilities have been previously evaluated and that this is the only way forward. The associated projections are always conservative — “it could be even better.”

And the valuation should be based solely on “the plan,” rather than the company’s history, and include all cash upfront. This opportunity is, of course, an easy no for us as investors.

3. The Manipulative Gamer

Some investment bankers take a prospective seller on already knowing to whom they will sell the business. We respect this strategy. However, creating a false market to play a game with said buyer is not.

The motivations for the manipulative gamer in creating a false market depend on who is compensating her, where they are in the timeline, and how far apart expectations between the seller and buyer are. In some cases, the banker believes that by bringing in other parties, she can get the intended buyer to quit stalling and pull the trigger on a letter of intent. In other cases, she wants to try to sweeten the deal at the last minute, simulating a “last-minute, unsolicited offer” that just can’t be ignored — unless it’s matched.

Being the target buyer in these situations is not enjoyable, but for the investors being gamed, it is a complete and utter waste of time. If we know an investment banker has done this to us or another firm in the past, we won’t look at anything from them. Period.

4. The Process-Obsessed Broker

An opportunity seems worth further exploration, so we request either written responses to questions or a management call to begin to evaluate culture fit, while getting more material details on operations and financials. The broker says, “Well, we’re following a specific process. Refer to page 5 for how to proceed if you’re interested.”

The first issue is that this communication is a quick tipoff to us that there are too many potential buyers involved, and the business will be sold in a pure-auction manner. Investment dollars are not created equal. If there’s not a significant opportunity to discuss operational priorities, culture, and management philosophy, that’s not a deal in which we want to be involved. If we ever made it to close, the transition would be a nightmare.

The broader issue is that sticking to a process prevents the natural course of a seller and a buyer getting to know each other. Some matches will benefit most from a quick introductory call, followed by email back and forth, while others will need to meet in person pretty early on. Forcing steps and a particular type of communication may be doing the seller, as well as the buyer, a major disservice. Allowing for momentum to naturally build when the match is right creates the most likely scenario for completing a sale.

Bonus: The Long-Game Player

The best intermediaries are natural matchmakers. When one deal doesn’t work, they don’t try to waste time or force it. They’re not running a speed-dating process, either. They are constantly talking to people, collecting signals, and when the criteria seem to align, they push the momentum in the right direction. They don’t hide expectations from either side, knowing it would only derail the deal in the end. And they know that by doing all these things, they are building reputations that keep past sellers referring friends and investors coming back to see what’s in their pipeline.

If you’re an investor, beware of the first four personalities, and strive to find and build relationships with these long-game players instead. If you’re an investment banker or broker, think carefully about how you come off to a potential buyer, be measured in your approach, and think long-term.