"Investment Banking is 10% Financial Analysis and 90% Psycho-analysis" – André Meyer  This blog is about the "other 90%"…

Credibility Account

09/10/2013  | Tags: , , ,

Credibility accountMidmarket investment bankers, if they are worth their salt, are paid to cause pain.

Let me explain.

Negotiation, when the stakes are high, is unavoidably a painful process.  It involves give and take and what has to be given (price concessions, risk reversal, commitment) are painful to the party doing the giving.  Therefore, the parties will try to give, of what’s valuable to them, as little as possible.

The entrepreneur selling his first company, or doing his first capital raise is facing unprecedented scrutiny of the affairs of his company and his own conduct.  The due diligence strips his financials naked. His accounting and MIS are scrutinized and the seller must face all its shortcomings and the resulting consequences. Worse, the representations and warranties are akin to a lie detector.  Any material hidden loss, litigation or problem not revealed in the agreement will haunt the seller for years and possibly cost him a bundle.

No wonder, if the private entrepreneur who is used to being accountable only to himself (and possibly his spouse) will be shocked by this “ill treatment” by the buyer and goes into denial. He will shoot the messenger, if he can.

This is where the investment banker must roll-up the sleeves, if he wants to close the deal.  If he had been doing his job, by that point in the transaction, he must have built a nest egg of credibility he can now draw on.  The bigger the balance in this “C account”, the higher his chances of taking his client to closing.

The deal will reach a point where the buyer will refuse to assume more risk or pay a higher price than the business is really worth.  The banker then must confront the seller to straighten his books, reveal bad debts and clear unmoving stock.  He will have to work with him to handle the tax risks that the buyer is reluctant to assume.

Of course, none of this will work, if the investment banker had not fought tooth and nail for his client, or promised him a higher price or lesser warranties and management commitment that is customary for this type and size of transaction in its sector.  The advisor must have the charisma, as well as the credibility if he wants to have his client swallow the bitter medicine required for the best available cure.

Istvan (Steve) Preda

Istvan (Steve) Preda

ispreda

Strategic Advisor and Investment Banker who helps companies grow, groom and get great investors.

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