Partnering With Investment Bankers (Part 2): 'Follow The Money'

In the previous edition of the Consultative Broker, we highlighted some of the important issues around working with Investment Bankers (AKA Private Equity Partners.)  Many of you are finding yourselves caught in the transition of ownership and expectations.  In this edition we will give you some specific thoughts on how to cement and grow this important segment of your large account book.

First of all, it goes without saying that your firm must be nimble and very skilled at placements across various geographic locations and industry segments.  That is a "given."  If you do not have these capabilities, it is best for you to spend your time elsewhere.

In the event you intend to stay relevant and "Follow the Money", here are some things you must do: 

  1. Elevate your business acumen.  It stuns me how many large account brokers do not understand EBITDA and Valuation Techniques.  In the event you intend to work with a sophisticated financial organization that represents investors, you need to know what they are trying to accomplish.  This is always translated into EBITDA and Valuation Multiples of Profit.

  2. Provide them the correct assessments of Cost Structure and Opportunities.  As you know, the purpose of their investment in most cases it to build the value of the company and then spin it off at a nice profit at some point in the future.   By providing the owners with an accurate Total Cost of Risk analysis, you can pinpoint areas of potential profit leakage or recapture.

  3. Translate your Value into EBITDA and Multiple Valuations.  Once you understand the goals of the Investment Bankers, it is imperative that you translate your outcomes to their terminology.  There is only one way to do this: through the application of Total Cost of Risk inside the firm's financial statement.  For example,  'What percentage of your EBITDA Goal have we contributed?',  or "How much have we increased your Ownership Value?

Here are several real examples of how Consultative Brokers have created value for new Investment Banking Owners:

Provided Negotiation Acquisition Savings to the Buyer.  Upon doing the due diligence of the new acquisition, the broker demonstrated the actual Total Cost of Risk for the acquisition to the Private Equity firm.  While the risk financing costs and retained loss costs were known, the indirect loss costs were not accounted for.  In this example, there were several million dollars of "unfunded" indirect loss costs.  The buyer was able to reduce the purchase price accordingly at the EBITDA multiple.  (For example, if there is $1M of unfunded indirect loss costs, and the multiple is 7 times EBITDA, the buyer should reduce its purchase price by $7M.)

Improved the Financial Performance of the Acquisition.  Once the acquisition was completed, the appointed brokerage firm used their resource capabilities to help the Investment Banker drive the TCOR costs out of their business model.  Through this reduction in costs, the new buyers increased their EBITDA percentage and business valuation.

Increased the Value for Sellers.  One of the key things that top flight Investment Banking organizations and their consulting partners look for is "business initiatives."  This is a main element in their assessment of going concern valuations.  Those firms who have ongoing business improvement initiatives command a higher valuation multiple.  They are perceived as developing a higher level of intellectual capital and growth opportunities than their competitors.

Here is a final thought around working with Investment Bankers and Private Equity Partners...  While your risk analysis, insurance and risk financing capabilities may be unquestioned, you must be able to support this inquiry:  How does your firm help us increase the valuation, income stream efficiency and EBITDA for our partners?

When you answer that question effectively, you will be able to "Follow the Money" with great success!

All the best to Consultative Brokers,

Rob Ekern
C.R. Ekern & Company