Insights of a Maverick Investment Banker_Sample

ISTVAN ‘STEVE’ PREDA
INSIGHTS OF A
MAVERICK
INVESTMENT
BANKER
My lessons
for business owners
about selling
entrepreneurial
companies in Central
Eastern Europe

© 2013 by Istvan ‘Steve’ Preda. All rights reserved. No part of this publication may
be reproduced, stored in a retrieval system, or transmitted in any form or by any
means electronic, mechanical, photocopying, recording, or otherwise, without the
written permission of the author or publisher.
Library of Congress Control Number: 2016920070
Published by: Amershire Publishing
Websites: www.entrepcoaches.com, www.imapmb.com
Illustration: Ákos Kiss, Rajzákos
Book Design: Zoltán Ember, a4-design
Text Editor: Erzsébet Aponyi
Publisher’s Cataloging-in-Publication data
Names: Preda, Steve, author.
Title: Insights of a maverick investment banker / Steve Preda.
Series: Insights of a maverick.
Description: Includes index. | Second edition. | Glen Allen, VA: Steve Preda Entrep
Coaching, 2017.
Identifiers: ISBN 978-0-9984478-2-7 (pbk.) | 978-0-9984478-3-4 (ebook)
Subjects: LCSH Investment banking. | Investments. | Investment analysis. | Risk
management. | Small business--Finance. | Sale of business enterprises. |
Entrepreneurship. | Success in Business. | BISAC BUSINESS & ECONOMICS /
Investments & Securities / General
Classification: LCC HG4529 .P743 2017 | DDC 332.6--dc23

Contents
Preface
Buyer Hunting
Seven Pitfalls to Avoid When Building for Sale
Company Selling Myths
Teaching From the Trenches
Rip Your Company-Muscles
GDP Kerosene
Synergies From Entrepreneurial Investors
Swell, Sell Or Slaughter
Start It, Build It, Sell It
5
7
17
25
31
37
41
47
51
55

Preface
This book represents a collection of articles I wrote for the
Firm Value newsletter between 2007 and 2012, some of which
have never been published in English before. My goal was to
share with you my experiences in raising capital and selling
companies in the challenging investment markets of Central
Eastern Europe. I hope you will find my writings interesting and
instructive.
Building a profitable business, positioning it as a marketable
product, financing its growth and eventually monetizing it is
always challenging and usually a long and arduous process. Most
often, small to medium sized businesses are sold when the
founders have reached a plateau from which they have no
appetite to make another run, for lifestyle or risk management
reasons.
Why take on the burden of recruiting a management team or
scale to the next level when you can walk away with a multiple of
profits and enjoy other activities, perhaps including launching
another business? For entrepreneurs, creating something new is
more exciting than tweaking and optimising an existing
business. Let strategic or private equity investors define a new
vision, hire professional managers, pile cash into new
equipment and ascend the next mountain.
Wishing you a good read and rising equity value.
Istvan ‘Steve’ Preda
Glen Allen, Virginia, August 2013
5

6

BUYER
HUNT
ING

INSIGHTS OF A MAVERICK INVESTMENT BANKER
Buyer Hunting
“Investors... Where to Find Them?”
This has been the most common question I received over the
years from prospective clients. An obvious inquiry, but one hard
to give a brief answer to. Therefore, here is the long answer I
would give if there was ever time to explain this topic in person.
Understand the Business
8
Stalking investors is a complex and multi-stage process. The
first step is to understand the business: Who will benefit from
buying the company? The more specialized its activity, the fewer
will be the potential investors.
How sustainable is the underlying business? To answer this,
study the company, its markets and competitors. What drives
growth? Where is the market going? How will investors make
money tomorrow? Do you need new ideas or a new management
team to make the target more attractive?
Let’s take the example of a leasing software developer. This
company could be interesting for the following buyer types:
• Diversified software companies aiming to break into the
leasing software market;
• Hardware distributors seeking to sell products to financial
institutions;
• Debt collection agencies supporting the leasing customers of
the software developer;
• Banking-software companies looking to plug holes in their
product portfolios;

BUYER HUNTING
• Family offices seeking growth-investment opportunities;
• Private equity funds looking for platform investments to
expand organically, or through acquisitions.
• Conglomerates seeking a flying start in software
development, by buying an existing operation;
• Dealerships wanting to beat their competition by acquiring a
proprietary leasing product;
• International leasing software developers that want to
recruit the management team of the target, etc.
To understand the business, study the company, its markets,
its competitors, and its peers. Research market trends,
companies offering substitute products and services, the life
cycles of similar products, the behaviors of competitors,
acquisition strategies and the bottlenecks and maturity of the
company’s markets.
Size up the growth potential of the market and the company
and, if these are modest, find alternative strategies for buyers to
generate further growth. If the buyer will not see how to make
the company more valuable, it will offer a lot less for it.
“Investors...
where to find them?”
Was the most common question
I received over the years
from prospective clients.
9

INSIGHTS OF A MAVERICK INVESTMENT BANKER
If necessary, model growth opportunities in the form of a
business plan, demonstrating the capital expediture and
financing needs and risks of growing the company. If the
founders want to exit at once, consider recruiting new
management, that would help create and underwrite a growthvision
for the company.
Brainstorming
Linus Pauling, Nobel Prize winning American chemist,
proclaimed that: “In order to have good ideas, we must have
many ideas”. The secret of idea generation is to harness your
own and your team’s creativity.
Brainstorm to find non-obvious buyers. Brainstorm alone,
brainstorm with colleagues, with clients, with investment
bankers, with their archives of past deals and with industryinsiders
and personal contacts. Record your ideas using mind
maps, blobs and sticks.
Buyer Types
10
Historically all our clients wanted strategic buyers (also
called: “trade buyers”), as it is logical to assume that trade buyers
with potential synergies and strategic growth interests should
be willing to pay the highest prices for acquisitions.
Strategic buyers are often interested in capturing markets,
seeking synergies, pursue vertical integration or diversification.
In the case of a meat processor, the acquisition of breeding
farms, feed-mixing plants, slaughterhouses and retail
distribution chains will increase net margins and help reduce
the volatility of profits, both of which could add value to an
acquiror.
Producers of substitute products or services may also be good
strategic buyers. A fish-processing company could be an
interesting target for a meat processor seeking to diversify into
healthier alternatives. Similarly, a budget airline might buy a

BUYER HUNTING
coach operator to hedge itself against the risk of terrorist attacks,
which may divert air travelers to roads. Such tie-ups could also
allow the cross-selling of services to both buyer and target.
Clients often treat financial buyers with skepticism, but these
days private equity funds and family offices manage more money
in America than the combined capitalization of public
companies, so they should not be ignored.
Financial investors often show more interest and bid higher
than strategics. Funds are under pressure to invest and they will
buy anything that can be fixed, grown, leveraged or consolidated
and has solid cash flows.
Even when they do not outbid trade buyers, their presence
will allow the seller to increase bidding pressure and achieve a
higher sale price than with marketing to strategics alone.
While strategic buyers are often focused on buying market
share and have narrow prospectives regarding the growth
potential of a target, financial investors tend to be open to ideas
on how to grow the business. Advisors add value by helping to
draw up an ambitious vision for the buyer and enlist outside-, or
prop up inside-management teams to sell it as their own.
Private equity funds will also consider companies with
limited organic growth potential, provided they can be used as a
platform for a roll-up of similar companies, have a business
model that can be exported, and solid leverageable cash flows.
Investor Universe
The next step is to use the investment profiles created to
uncover matching potential investors. The source of such buyers
may include, but would not be limited to, the following options:
Banker contacts, past acquirers, databases of US, European
and Asian strategic investors and specialist private equity funds,
listed companies, players found in industry research and news
archives.
There are also subscription-based “dating platforms” for
company sellers and buyers, such as Axial.net, which allow the
sellers’ advisors to selectively and gradually reveal information to
11

INSIGHTS OF A MAVERICK INVESTMENT BANKER
qualified and vetted parties looking for opportunities in certain
sectors and situations.
The thus researched buyers all go into a “long list”, which is
then filtered to weed out the low-potentials. What remains is
investors for whom the target makes strategic sense, that have
cash or a strong balance sheet to finance the purchase, and are in
a growth phase.
From this reduced list: (1) serial acquirers, (2) growthcompelled
public or private equity owned companies, and (3)
highly synergistic buyers are prioritized. To these, add hot
contacts of your investment banker and their network, where
they are close to the ear or enjoy the confidence of a decision
maker.
One such hot contact-generated deal was my firm’s sale in
2010 of green energy contractor STS Group to industrial holding
Videoton, for whom this was the first foray into the energy
sector. Personal contacts are often critical in selling companies.
Stalking the Buyer
12
Cash rich and growth oriented companies are “eligible
bachelors” that are constantly bombarded with acquisition
ideas. However, most of these calls represent scattergun
approaches, which CEOs will spend little time to consider.
Companies with mergers and acqusitions (M&A) departments
might review such cold mail opportunities, but even they must
prioritize offers from known sources that are perceived more
credible.
The opposite is the case when a decision maker receives a
personal call from an intermediary or advisory company she is
familiar with, and when there is a “face” to the opportunity.
Successful investment bankers nurture their contacts by
presenting to them only high-quality, tailor-made deals.
Even inside our own international M&A organization,
“IMAP”, those partners receive the most attention that deliver
quality deals, versus the ”assembly-line producers”, that
distribute proposals indiscriminately. It is important to only take

BUYER HUNTING
on doable transactions and present them in a digestible and userfriendly
format, as the attention span of buyers and their
advisors is short and they are looking to disqualify anything that
is outside the sweet spot of their interest.
Evaluation
Shortlisted buyers sign non-disclosure agreements, receive
investment memos and a timetable with next steps. Some misshits
give insights into neglected areas and unearth new
brainstormable fields of research and often lead to finding new,
unobvious buyers, with high added value.
After strategic buyer sources have been exhausted, move on
to financial investors. Here the industry specialist and
geographically focused buyers are prioritized over generic
private equity funds.
Alternative Strategies
If the basic strategies prove unsuccessful, turn to other ways
to fulfill your objectives.
Outliers. One such approach is to find outlier buyers out of
sight of your network’s contacts, often in international markets
through one of the earlier mentioned “dating platforms”.
Years ago, such a service helped us locate an Indian buyer for a
South Hungary based industrial company. The buyer conducted
a due diligence, but eventually pulled the plug due to
communication problems with the management team that was
positioned to take over from the founders. The fact that there was
no restaurant in town that the vegan buyers liked did not help
either. Lesson: Cultural differences can create critical obstacles to
deals and must be managed continuously and carefully.
MBO or MBI. Another option is to arrange a management
buyout (“MBO”) or management buy in (“MBI”) to mobilize
management from within, or from outside the company,
respectively, and to raise financing for such purchasers to
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INSIGHTS OF A MAVERICK INVESTMENT BANKER
acquire a majority or a large minority stake. (The better known
MBO’s are actually rarer, as exits are more often catalyzed by the
lack of inside succession management and the burnout of the
founder.)
Equity release or Recap. Often called: Dividend
Recapitalization or “Recap”, an equity release allows the
founders to take money out of the business in exchange for a
large minority or small majority equity stake, financed by a
combination of equity investments, bank debt, or mezzanine
equity. Recaps are often followed by a subsequent transaction
after three to five years when the investor would exit, giving the
founder a “second bite of the apple”.
Gradual Sale. These are last-ditch solutions for companies
which are often not, or only marginally profitable, have no
management to take them over, or promise low growth. In such
situations, the main value is the market presence of the company
and its offering. In order to create material equity value which
can eventually be sold, an appropriately connected and
competent management team is needed.
In return for their efforts, and occasionally monetary equity,
the incoming managers will get to ride a “horse”, i.e. will have the
opportunity to take over the leadership of a mature company,
which is often easier then to start a new one up.
A gradual sale will only work if the parties trust each other.
The seller will have to allow the investor to assume the reigns,
and the buyer will have to rely on the seller’s assurances that he
would not abuse his majority rights to deny the buyer’s share of
the eventual profits, and to later allow the transfor of control at a
pre-agreed price.
Gradual sale works best in the case of intra-family, intracompany
successions, or with reliable business partners.
Winding Up. The final alternative to a sale is a winding up,
where the sellers harvest the value of their company by selling
assets and liberating working capital.
14

BUYER HUNTING
This strategy will work for companies where there is no buyer
who would pay for goodwill, or even the book value of the firm,
while there are significant and monetizable working capital
assets (sellable inventories, collectable receivables) tied up in the
company.
Such companies often operate without recognizable brands,
at low margins, sometimes at the mercy of big box retail
customers that pay them slow and require them to warehouse
and take back unsold products. Importer-distributors of Far
Eastern commodity consumer products often end up with this
fate.
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16

SEVEN
PITFALLS
TO AVOID
WHEN
BUILDING
FOR SALE

INSIGHTS OF A MAVERICK INVESTMENT BANKER
Seven Pitfalls
to Avoid When
Building for Sale
If you are building your company for exit, it’s worth avoiding
the most common obstacles in the way of building and eventually
selling your business. Here are the seven biggest:
People vs. Procedure
18
Good people are key. A sellable business is built on people,
who can eventually run it without the founder. It is hard to hire
the best people when starting out, as the ablest graduates
gravitate to high-paying, well-established companies. Even for
high-growth startups it may take years to become able to attract
top graduates.
Experienced people are also difficult to hire, as they are either
already successful where they are, and thus will stay put, or not so
much, while still expecting high salaries and benefits. If Fortune
500-groomed, they may also be the wrong fit for an
entrepreneurial culture.
Don't be at their mercy. If you eventually get to hire the best
and the brightest, be sure they do not become indispensable and
get to “own” part of the enterprise value of your company. Small
business niche marketing guru, Dan Kennedy, famously stated
that “” is the worst number in business. Don’t allow any
individual to monopolize sales relationships or processknowledge
in your business.
Big companies train associates for the jobs of neighboring
departments to cover for vacations and career changes, and to
build the business on documented processes. Failing this, your
enterprise is under the risk of its intellectual capital walking out

SEVEN PITFALLS TO AVOID WHEN BUILDING FOR SALE
the door, or dictating a pay rise. Build job descriptions and
procedures as soon as they crystallize. Even write a procedure for
writing procedures.
Hold the keys. The owner should, as long as possible, control
key functions: strategy, innovation, marketing, financing. Brands
and intellectual property need to be protected and ring-fenced
from the business, so a frivolous lawsuit cannot deprive you of
key components of your enterprise. This is easiest done through
an asset holding company, incorporated in a high-security, lowreporting
jurisdiction, such as Nevada. Your tax advisor will
know.
“Hold the keys”
The owner should,
as long as possible,
control key functions:
strategy, innovation,
marketing, financing.
One Person Show
All companies start that way and many remains stuck at the
level of being a founder-dominated organization. It is a natural
start, as typically the founder represents the brains, heart and
work ethics of the organization, until his values become wired
into the culture of the company.
The founder is often a driven man or woman, who will
accomplish the task of five to ten employees. The owner’s cheap
labor makes the early company profitable and self sustaining, and
the start-up will not have the scale for a while and be able to
afford to pay the staff that would have to replace them.
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INSIGHTS OF A MAVERICK INVESTMENT BANKER
Over time, most companies reach the stage where the
founders cannot anymore efficiently keep all critical functions in
hand. At this point, they should document their functions and
spin off jobs for which affordably paid employees can be trained.
This move will feel costly and inefficient initially, but it is the
only way to free up the founders, so that they can focus on more
valuable growth opportunities. A one-man consulting firm with
limited overhead will almost always make a higher margin on
labor, but it is a professional practice not a business.
The Bootstrap Trap
Many successful entrepreneurs start with no or minimal
capital. Some due to lack of financing, others to manage risk.
Better to double up as experience grows, than go bankrupt before
the business finds its path to success and scalability.
The flip side of risk-management is slow growth, and while
the founder avoids debt and dilution, competitors may develop
faster and overtake the leader in the market. In many industries
the leader makes most of the profit, so it’s not fun being an alsorun.
There is an inflection point at which the founders may
consider bringing on board an investor to fund the acceleration
and the rollout of their, by then proven, business model.
The other danger of bootstrapping is that it can kill the
momentum of the company. When sales or profitability start to
flatten, investor interest falls off dramatically. The
entrepreneur’s confidence could also falter, causing burnout
instead of the exhilaration that is critical to their success.
The key to partnering is keeping control of the business
trough continual initiatives and by balancing risk and
performance.
20

SEVEN PITFALLS TO AVOID WHEN BUILDING FOR SALE
Top Line Focus
The fast growth of the early years will not last forever. At some
point the business will exhaust its profitable niche and will be
forced to enter markets on the fringe of its core competence,
where growth will come at the expense of eroding margins.
The founder is often the engine of value creation, so it is
unavoidable that profit margins fall as his impact is becoming
spread thinner in a growing company, over time. Scaling helps
reduce proportionate expenses, but corporatization often
alienates people and attracts slackers. It takes the focus and
ruthless discipline of Jack Welch to constantly weed out subpar
performers.
The top line is often easy to grow at the expense of
profitability by taking on marginal projects. Your company must
avoid commodity terrain by shifting attention to R&D,
innovation and marketing. It will have to say no to marginal
customers and opportunities, and constantly fine-tune, even
shift, its offering to stay in a differentiated and valuable market
position.
Buyer Becoming Boss
The difference between a business and an outsourced provider
is independence. It means serving multiple masters, none of
which can blackmail you into giving up your profits or strategy.
Interdependence sounds nice, but rarely works in practice, as
customers will loath to expose themselves to the performance
risk of a single contractor and therefore will seek to keep multiple
providers in play.
Independence costs focus and performance and profits in the
short term. However, when sales are concentrated with one or a
handful of customers, the business faces the risks of exposure to
the loss of key clients, weak position in price negotiations, and
when a buyer dictates terms, the inability to develop proprietary
products.
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INSIGHTS OF A MAVERICK INVESTMENT BANKER
When dependence becomes permanent, it limits the value of
your business. The dependor will either deprive you of your
profits, or become a de facto option-holder on your business.
Worse, the dependor may become capable of taking over your
business virtually for free by withdrawing orders, or blocking
access to end-customers. Such step would threaten bankruptcy,
unless you capitulate and give up control.
Endeavor to reduce your concentration to any of your
customers to below twenty percent of sales and make sure eighty
percent of your sales and profits come from at least five
customers.
Playing Without Endgame
22
All good things come to an end, but for the end to be good, it
must be planned.
Companies grow to the size their founder can manage. Often
this is the point where an independent management team will
have to be appointed to facilitate further growth. However, this is
a painful and risky step for many owners. A wrong choice can
break momentum and extra costs will cut into margins and eat
into equity value.
Just the thought of letting go makes many entrepreneurs
shiver. Transitioning the founder’s job will often take several C-
level executives, who will want cars, secretaries and corner
offices, costing a bundle. The corporate incomers will try to
“institutionalize” the company, which may dampen the
motivation of legacy employees.
Apart from transition issues, every founder or management
team has a life cycle. Gene Landrum in Entrepreneurial Genius
talks about a 15-20 year incubation period for billionaire
entrepreneurs before they hit their stride. But billionaires are
often the exceptions, who can rejuvenate when they have reached
their original goals, while most entrepeneurs cannot.
The average successful entrepreneur has a business life cycle of
10-15 years, over which they will accomplish their mission and
gradually lose interest, or tire of growing the business. This

SEVEN PITFALLS TO AVOID WHEN BUILDING FOR SALE
inflection point is where the most valuable exits often happen,
when buyers are willing to pay for a still growing company.
Catching the peak requires careful planning. Sadly, few
entrepreneurs are aware of, and strategic enough, to plan ahead
for the exit and thus most will fail to sell at the peak.
The best sweetener to a sale is an in-house successor groomed
for the job, who will underwrite the business plan for the investor.
The founder may then depart with a full payout, in most cases.
Selling Over the Hill
Investors purchase companies to make a return. However, they
will only succeed if they buy at a discount, or at the market price
with the opportunity to grow the acquired business. Companies
with low or no growth will sell at a discount or not at all.
On the other hand, exiting too early leaves money on the table,
when the company could have been sold at a multiple of higher
profits.
The trick is to start the sale process approximately twelve
months before the anticipated peak. This will allow the company
to continue growing through the auction process, maintaining
the seller’s negotiating position to closing. Buyers love to buy into
a growing business, and will be ready to pay for the future as well
as the past. At least twelve months lead time is required as the
process might drag out.
If the numbers start flattening during the sale process, the
buyer will get cold feet and disappear or begin chipping away at
the price. It’s better to leave some meat on the bone than to restart
a failed sale process for a company with stagnant or eroding
earnings.
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