When we are interested in an opportunity, we build two lists of questions: one data-specific list for written response and one with largely open-ended questions for discussion on a management call. We actively avoid processes in which we are not permitted to ask questions before submitting an indication of interest.
A good financial package provides the facts, a great CIM provides the story, but our questions for intermediaries and sellers are not just trying to gather additional details. Here’s what we’re trying to learn, but not explicitly asking, in those question sets:
How are decisions being made?
In questions posed about significant decisions in the company’s history, we’re looking for evidence of who was involved, how options were developed, how many options were considered, how well the plans were executed, how carefully outcomes were analyzed afterwards, and who took responsibility. The responses serve as a starting point for understanding how well-run the organization has been to date, what type of leadership is already in place, and how self-aware ownership is of their involvement (or lack thereof).
What vocabulary is used in discussing the company?
A seller who references “our team” represents a different proposition from one who talks about “my staff.” We look for terminology that provides insight on company culture, decision-making, and chains of command. Our general recommendation to sellers is to be both authentic and thorough in responses; if you have a casual environment, there’s no need to dress up the conversation.
People tend to get fluffy when what’s being discussed cannot be supported by hard facts, which is why we also pay attention to insincere enthusiasm and use of frivolous adjectives and adverbs. If we hear terms like “great leaders” and “tremendous growth potential,” we press for more details. We like to hear the evidence speak for itself through stories and quantified plans.
And then there’s our consideration of general communication style. If someone is selling equity, there’s always a reason. We don’t do well with hide-the-ball. Overly-broad, pensive, or confusing explanations aren’t greeted favorably. You can’t tell us the company is simply amazing, in a Ben Stein monotone voice, and expect us not to question the pitch further.
Have you done your due diligence?
There have been several instances in which we’ve dialed in to a scheduled call, just to be asked, “What firm are you from again?” If we’ve scheduled a management call with you, we’ve put serious time and effort into preparing for that call. If you don’t know at least the baseline facts about our firm, we infer a lot. To put it another way, if you’re not looking into the credibility and perspective of your prospective buyers, there’s a better than fair chance you’re not a viable opportunity.
As a side note for sellers, it’s okay to ask us hard questions, too. In fact, we welcome it.
On what do you place emphasis when discussing the future of the company?
When selling a company, a great deal of space and time is often devoted to talking about the future. These conversations can be frustrating for us as potential investors, as everything being discussed in the future context is de facto unproven. Yet, we’ve found that growth plans can be an effective topic for quickly determining whether we are an appropriate investor.
It’s been our experience that, generally, the bigger the opportunity pitch (hear: “Our $10 million company should be a $100 million company in five years!”), the greater the likelihood that a growth plan has been hastily assembled in an effort to get to market quickly.
We listen intently to the story presented. If we hear emphasis being placed on R&D, we know to dig in on past successful product launches and projected CAPEX. If we hear emphasis on specific team members’ involvement in future success, we like to explore team dynamics. If we hear lots of references to competitors and large economic trends, we know to challenge why the presented plan will make them a differentiated competitor in the marketplace. If we hear dollar amounts assigned to growth plans and little consideration of alternatives, we know that we either need to be on board, or politely decline.
We also look for inconsistencies in the story. As an example, we recently talked with an organization whose CIM said that they could easily increase revenue by further client diversification. In response to another question, they explained that they have several major clients with exclusivity clauses in place that would conflict them out of the proposed growth plan. You can market something other than reality, but the truth will generally find its way out.
Would we want to have dinner with you?
We sincerely like what we do for a living, and we want to spend our time with people with whom we can get along. It’s why we have a No Asshole Policy. It’s also why we always pay attention to the tone and sincerity of intermediaries and buyers with whom we communicate.
We equate buying a business to getting married. It’s a lifetime commitment and dating is a necessity. If dinner is rough, we know we’ll never make it through due diligence, let alone a positive transition.
Do you care who invests?
As with many things, effort influences quality. If an intermediary is hard to get ahold of, slow to respond, or generally curt, we make assumptions about the likelihood that we’ll get anywhere with the opportunity. If a seller provides incomplete responses, shows up late for the management call, or doesn’t make much of an effort in the conversation, we make assumptions about what you’re seeking – other than a check.
A transaction and transition is a brutal process, which is why we take early questions, and responses, seriously. We’d encourage you to do the same.