This detailed plan should help you stand out from other funds making unsolicited approaches that are too generic and not as well thought out as yours. In an ideal scenario, you will succeed in setting up a meeting with the company. However, in the majority of cases, things will not go exactly as you expect. The company might decline to meet or inform you that it is not for sale. Other targets will be open to a potential investment, but the timing may not match yours. Plan to approach several companies before the stars align and allow you to progress to the next step.
You should expect that maintaining contact with the prospective companies will take significant time and effort. One of the worst things you can do at this stage is fail to follow up with a potential deal target because you are distracted or busy. It is important to stay organized and take notes of the multiple touch-points you have had with each company by phone and email. If one of your deal targets is not prepared to start a dialogue with you due to a timing issue, schedule a reminder in your calendar to get back in contact with them in due course. Make sure both parties understand what next steps are discussed, follow up as agreed and never lose a promising deal prospect.
7. Go visit companies to convert deal ideas into real transactions
Now it is time to hit the road and meet companies in real life. This is the last step of the framework; however, you may find yourself having to repeat it over and over again, sometimes over a long period of time. The objective of this step is to make a strong connection with your deal target, learn more about its business and create actionable next steps that ultimately lead to a transaction. Since you have been evaluating the company only from the outside so far, it is difficult to predict where there might be vulnerabilities or mutual deal breakers. I recommend treading carefully: listen, observe, turn up your charisma to the max and be prepared to embrace your inner diplomat. It is worth keeping in mind that some of the company employees you will meet might feel anxious and uneasy about your visit, especially if they have limited experience dealing with investors. Be prepared to put them at ease.
Is there a wrong way to conduct your first meeting with the company? Yes, absolutely. In my experience, this happens when investors do not listen patiently enough to the company and prioritize their own needs over those of the deal target. For example, sometimes you just have to let the CEO veer off-topic for a period of time to avoid alienating him. Also, you have to suppress your inner desire to jump straight into clinical detail, even if you suspect potential deal breakers in these areas. As a rule, exploring recent strategic failures, asking pointed questions about the financials, or requesting a detailed data set are not appropriate actions at this stage. Stay away from sensitive topics and proprietary information, especially if you have not yet signed a confidentiality agreement. In summary, the first meeting with the company should not feel like an interrogation. It should feel like a friendly conversation between two likeminded parties forming a productive long-term partnership.
Is there a good template to follow for your first meeting with the company? Yes, absolutely. However, you need to go beyond private equity and look further afield into other areas where professional success stems from total mastery of communication and people skills. I personally found it useful to look into the field of sales. Yes, you read it right, sales. Many private equity investors are hesitant to admit that they are salespeople of their capital and value-added involvement in portfolio companies. They have to court companies, sometimes for years, to close a deal. That's not too dissimilar to what people do in sales, right? This is the logic that compelled me to investigate the techniques used by sales professionals and tone them down a few notches to make them appropriate for the more introspective field of private equity. Holmes (2007) provided a useful outline of key sales skills in his popular sales and marketing book. Let's take a look at these skills applied to the situation of a private equity investor meeting a promising deal target for the first time:
Create rapport. Think about good ways to break the ice. A good starting point might be to mention topical industry news or congratulate the company on reaching a recent milestone. Focus on demonstrating empathy, having a sense of humor and, if appropriate, mirroring the attitude and tone of the people you are meeting.
Establish need. What is the company's current positioning and what is its vision for the future? What are the most pressing needs and problems of the business? How can your capital help?
Build value. This is an opportunity to introduce your fund, demonstrate your industry expertise and share your proprietary insights acquired through deep research. You need to come across as an empathetic and knowledgeable partner.
Create desire. This is a good time to mention your fund's other relevant successful investments and explain how you were able to create tangible benefits for your portfolio companies. Provide enough detail about the issues faced by other businesses and describe how your fund was able to resolve them. Draw any meaningful parallels between your past investments and current situation.
Overcome objections. Acknowledge any concerns that the company might have about accepting a private equity investment from your fund. Listen attentively and try your best to understand the company's perspective. Then isolate each objection and try to deal with one concern at a time. You might need to follow up with additional information after the meeting to strengthen your position.
Close. One of the best possible outcomes of this meeting will be agreeing with the company on a set of actionable next steps. Hopefully, you managed to establish a strong bond with the management team and prepare a fertile ground for any subsequent follow-ups.
What happens next? There are three possible scenarios. The first one is that the initial meeting equipped you with enough disappointing information about the business to enable you to conclude that you are not interested in moving forward. In this case, it is best to thank the management team for their time, provide them with your honest feedback about why the company does not quite fit your mandate at present and discuss what business adjustments would be required for this decision to change in the future. The second scenario is that you like the business but you sense that the company will not be ready to accept a private equity investment for a considerable time. In this case, you need to make sure that you communicate your continued interest and schedule a follow-up meeting at some point in the future. I believe that keeping in touch with the company will allow you to build a good relationship with the management team over time and enable you to create enough neural pathways in their minds that might ultimately pave the way to a transaction with your fund.
The third and best scenario is that you like the business, and the company owners are ready to consider a potential investment from your fund. It means that the thematic sourcing approached worked and you are ready to start work on a new transaction, possibly even a proprietary one. Now is a good time to sign a confidentiality agreement and request enough information regarding company operations, business strategy, growth opportunities and financial performance to properly evaluate this investment opportunity.
Well, you have made it to the end of the ICEBERG Roadmap™. I know: it is a long and arduous journey to read through these 7 steps in detail. However, I believe that this framework (or your own adapted version thereof) will improve your deal sourcing approach and ability to deliver deals. Hopefully, proprietary ones.
Notes
1 1 ICEBERG Roadmap™ is a registered trademark of my company, Lavra Group Limited.
2 2 For a comprehensive external environment analysis tool, please refer to Narayanan and Fahey (2001). Please refer to Chapter 2 References for a complete citation.