Original interview hosted by Entrepreneurship Interviews in May 2012
The world of entrepreneurial funding is a bit murky and even somewhat nebulous for most of us. We know there are people willing to give money to start-up companies, and we certainly know of start-ups who could use the money! Beyond that….. it can be a bit fuzzy.
I had the rewarding opportunity to interview Mark Gaeto, a Managing Director at Falcon Capital Partners, LLC. (https://www.falconllc.com/) to see if I could get some clarity on this subject. Mark and I have known each other for quite a few years, so the interview process was easy and informative.
Falcon Capital, LLC, in their own words, is “a leading transaction advisory firm offering merger & acquisition advisory, strategic advisory, and capital financing services to middle- and lower middle-market companies”. This means that they can be brought into a company at any point: before a sale begins for strategic assistance, offering guidance and assistance during a sale, and also be the party who can bring the money to the sale. Of course, they are also in business themselves, and therefore need to generate their own revenues and profits. As Mark says:
I create revenue by selling client engagements. To do this I have to build a rich and recurring book of business using a variety of approaches and tools. I can only succeed if I bring successful outcomes to my clients by providing a structured and fact-based approach to their specific situation.
As we’re reading in our text (Amis & Stevenson, 2001), finding deals is not necessarily all that easy. It is a numbers game, as well as a quality game, so there is a goal of finding multiple deals in order to sift to find the good deals. Falcon Capital typically completes 20 years a deal, with Mark alone doing anywhere from 2 – 6 a year.
Creating revenue is about networking, meeting and then building relationships with business owners and entrepreneurs. I need to gain their attention and then trust. This takes time and patience is required. Once done, I can offer services to help the business owner exit to a strategic buyer or assist his firm with acquiring a company, or help him or her grow their firm via a growth plan that requires expansion capital.
Karen, I started my practice from scratch. Building a book of business is all about selling and selling is a numbers game. There has to be lots of activity. However it has to be well thought out and planned. There is a lot of heavy lifting that needs to happen. Starting out in this business was very difficult and it takes time. I get most of my clients by networking at venues where I’m known or have qualifications. Because I have a successful track record, I get referrals.
I work closely with estate attorneys, CPA firms and wealth management companies. I do a great deal of networking and attend trade shows and conferences. For example, I just returned from SAP’s Sapphire event. I will probably attend Oracle’s and Salesforce.com’s user events this fall. Of course, one has to have the requisite website, social media memberships and provide research and reports via the web. Let me say it again. Selling is a numbers game and it requires activities. You need to get eye-to-eye with owners, influencers, decision makers.
Yowsa! So much for my view of business being done at country clubs and during golf games. Just kidding, Mark… And even though the economy has and still seems to be taking a beating, for Mark, he and his company have been noticing a bit of an uptick in both business volume and the sales prices.
2008-2009 were very, very tough years. Our advice to owners back then was “don’t sell”. A hard thing to say when you make money when owners do sell! We did so because it was the right advice. The valuations were low and buyers were too cheap with their offers. The market just wasn’t the best. Some owners did sell for various reasons and some fair deals got done. No one was raising money. In 2010 we started to grow again. 2011 was a better year and 2012 should be a very respectable one. This is a good year to prepare for an exit or funding.
And where is Mark’s sweet spot in the business world? As he focuses more on the business sal , with 60-70% of his engagements on what he calls ‘sell-side engagements’ or helping business owners sell their firms, he is usually involved with mature companies.
Funding engagements are mainly for established firms with at least 3 Million in EBITDA [earnings before interest, taxes, depreciation and amortization]. We do some funding for early stage firms – ones that have some level of revenue (at least 2 million in revenue). We don’t assist early stage start-ups and we do not invest in them. We are more than happy to meet with them and provide them with guidance.
Of course, while this is all about business, there are people involved, and people who have a large invested interest in making this work to their own advantage. So what has Mark seen in transactions?
It can get very emotional and a lot can go wrong in any deal making. You just hope that you’ve done your homework and have the facts so you can properly represent the transaction to each party (seller and buyer).
Negotiations are negotiations and we love it, but I don’t like it when people outright lie.
Follow-on questions weren’t really an option to that last statement, but it seems like when Mark’s done, he may be able to write a book on ‘what people will say in order to make a lot of money’!
And of course, it always helps the transaction when the owners are knowledgeable and aware of how they make their money, and where their business value is. The following discussion focuses on how business owners can ensure the best valuation for their firm and attract key resources; both companies like Mark’s as well as potential investors and / or buyers.
Owners and entrepreneurs should seek advice early. Thinking they can sell their firm, buy one, or raise money themselves is in most cases (not all) a mistake and usually a big one. Also, and this may sound odd, but there are some owners that don’t fully understand how they make money. They don’t understand their business model for generating operating income and profit.
They need to be able to define the company/business in a single declarative sentence or two.
They need to be able to accurately describe the pain of the customer that their service or solution addresses/solves.
Owners need to really understand their vision or where they are going. The vision statement should be very succinct. It needs to be based upon the facts of the market and not on some crazy thought or ambition. They need to understand what 2-3 initiatives drive the vision. The initiatives needs to have targets and metrics (and budgets). They need to understand how to get things done. They need to know how their firm is different from competing offerings. They need to understand how their products impact a potential client. Why should a potential customer do business with your firm and what is in it for them?
Amis, D., & Stevenson, H. (2001). Winning angels. Great Britian: Pearson Education Ltd.