Learning to speak the language of the investor

Sydney Harbor Bridge; Shutterstock ID 706112860

EverEdge sat down with the investment banking team at Arcbridge to discuss why early preparation when selling a company requires understanding the cultural nuances of investors in different parts of the world, using the examples of Australian and US private equity firms.

Selling a company could be one of the most important things a person can do in life, right up there with having a child and getting married (at least the first time).

Unfortunately, a lot of founders don’t appreciate how intense the process of transaction readiness can be. And many, many more wish they’d started preparing years earlier. Worse, they often don’t realise that investors tend to follow unspoken cultural nuances in how they deal with an approach to acquiring a business.

Knowing how to navigate these preferences can go a long way to improving the odds of a successful – and lucrative – transaction. Let’s look at Australia and the US as examples.

The first thing to know about Australia’s private equity (PE) firms, and its broader capital markets, is their impressively high level of sophistication. Sydney may not roll off the tongue when listing financial centres such as Hong Kong, New York, Frankfurt or London, but it certainly boasts world-class talent and investors.

As such, Syndey houses dozens of firms that operate with mandates to buy just a single asset class or into one sector. It could be broad like cosmetics or technology, or laser-focused like upstream mining exploration in the Indian Ocean. These boutique firms are not small, either. Most have billions of funds under management. They know what they want. And they know what to do with an acquired asset once they sign the agreements.

Because of their specialisation, these firms won’t be interested in going on a list of potential buyers once a company is ready to sell. They will want your company to approach them early in its transaction readiness journey. If these firms show a hint of interest, it’s probably because they’ve already done the homework, and they don’t want to end up in an auction.

Australian PE firms offer the promise of taking a company global. But they will also want the target company to be higher up the value curve, with solid fundamentals and a vision to move fast into competitive new markets. Looping a potential Australian buyer into the conversation early, and then listening to their advice, can significantly boost the chances of a successful exit.

Looking across the Pacific, the Americans also have some curious idiosyncrasies.

The US is also packed full of boutique investment firms that have specific goals and a preferred way of doing transactions. But where many founders trip up is not learning how to “speak American” to investors in the Land of the Free, Home of the Brave.

What do we mean by this?

If you listen long to founders returning from trying to sell in the US, you’ll probably hear sheepish stories about how they were yawned out of an investor’s office. Their casual dismissal wasn’t because the product or company was bad. Rather, the problem was that their pitch matched the valuation too accurately. Know your audience!

Americans aren’t stupid. They will certainly perform thorough due diligence on any proposal. But, as the old saying goes, if you’re trying to sell something, it is first necessary to get the buyer’s attention. Americans want to hear energy, excitement and an ambitious growth story. So, don’t let humility get in the way of a good pitch.

After all, every American proudly says they have a billion-dollar “unicorn” company. Take your cue from this cultural idiosyncrasy. Rather than sticking to the audited, antiseptic valuation of 5x, for example, try talking it up to 10x or 15x. It doesn’t have to be accurate. It just needs to get their attention.

Once you’re in the room, then American investors will want to see proof that the company has the structure and potential to do well. They know it probably won’t grow 15x in two years, they’re not stupid. But are its fundamentals clean? Is the leadership competent? Has the company reduced its key person risk? Has it budgeted for resources? Americans respond to a good story, but they also need to see a real business under all the fluff.

This third piece of advice touches on a universal truth: an attractive company will be doing all the basics right.

Far too often, founders will get trapped in the eddy by thinking a “lean” business is fine so long as the product is of high quality. While this sounds like prudence, it can be fatal to a transaction. After all, investors aren’t overly focused on the upside of a target company. They already know the value of the product or technology and have a plan to scale. What concerns them is risks.

Every investor knows that the real kicker will be whether the target company has spent the required time on structuring correctly for growth or buying a C-suite at the perfect moment. Getting the basics right makes it that much easier to convince an investor to buy.

A good deal is a low-friction deal. Investors are just like you: they want to put as little work into their acquired asset as possible for the maximum return. To get their attention, it’s important to speak their language and understand what makes them tick.

Couple that with doing the basics right, a founder can drastically improve their odds of exiting at the higher end of the valuation range.

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