Revisiting the Topic of “Is 2011 the year of M&A, IPO or the return of Private Equity ?”

February 28, 2011

In 2010, I kept getting asked about this – it seemed to be the topic de jeur in many of the meetings I was in during H1 of 2010.

Check here for a link to the 2010 blog entry I wrote.

As I said last year, everybody has their reasons why they might favour one dominant approach (M&A versus IPO versus PE Funds) over the others, and ultimately that’s what it tends to be … people pushing their own wheelbarrow on the coat-tails of one of these types of trends.

Irrespective of which one ultimately dominates during 2011, there are some things we can definitely observe and therefore make some educated guesses about:

  • Mergers & Acquisitions will continue to be very busy during 2011, continuing what happened in 2010 with industry consolidations and tactical acquisitions.
  • The number of attempted IPO’s in 2010 was only a small % of the successful ones. In 2011 this % will be much higher, and also be based on a much higher number of attempts.
  • Private Equity got a bit of a run-on during 2010, but is still being brought unstuck by having to hold onto the trading operations for much longer than they used to.

Now, whilst those observations are very much SFW, there are some specifics to consider.


  • M&A activity will actually be stronger again in 2011 than in 2010, last year it was about businesses leveraging their balance sheets again. In 2011 it is all about growth by acquisition.
  • Businesses were being picked up at 3 x EBIT early in 2010 it got better through the year – but didn’t get to the 6 x EBIT I thought it would. However, roll-ups have intrinsically greater value than a tactical acquisition and this is being borne out by some of the multiples being achieved.
  • At the larger end of town hiring of staff has become very tight, in the SME space it isn’t as tight but this is because they’re being less picky. As always, acquisition is an easier way to get the right people (then you just have to find a way to keep them !!).


  • Public interest/appetite in solid businesses looking to list has continued to increase, and will do so throughout 2011.
  • Trading conditions are still very fragile in some sectors, so whilst IPO’s are a viable option again, there is definitely enough downside risk to require caution.
  • There are some heavy duty businesses looking to list, an example is the iSelect business in Australia which I gather is looking to IPO and list towards the end of 2011.

PE Funds.

  • The Facewash/Strip/Sell strategies are still not viable because of the EBIT multiples available.
  • PE Funds have had to hold and run businesses for the last 2-3 years, previously they’d have been out in 12 mths.
  • The PE Funds have now got a totally different skillset/timeframe/approach courtesy of the GFC.
  • Providing that trading conditions improve there will be a number of PE Funds looking to offload businesses during 2011, as they seek to reset their investment strategies for the growth times ahead.

Given all of the above, it will be a very active and interesting year for Corporate Advisory firms (like ours) and for those businesses out there that have a good story to tell.

Feel free to contact me if you want to explore this topic in greater detail.


In 2010, high-net-worth individuals are looking to invest in private companies

April 22, 2010

According to a recent survey of 4,169 Australian investors conducted by Wholesale Investor, investor sentiment in private sector investments is buoyant.

The statistics revealed:

  • 76% of investors are seeking investment into private companies
  • 53% have $500k or more to invest
  • 72% believe now is a great time to invest
  • 79% of investors have over 50% of their funds in cash, ready to invest
  • 91% would invest in an early-stage/start-up if strong Board/Management was in place and in a preferred sector
  • 55% said their biggest challenge was finding suitable deals
  • 63% were looking to invest directly into companies
  • 61% sought an equity stake of less than 20%

In addition, the survey revealed several positive factors influencing the private company market.  These include:

  • Former MDs and CEOs are now actively pursuing high-growth businesses.
  • Many smaller VC and PE firms are forming and looking to gain exposure to high quality companies.
  • Larger private firms are taking advantage of market conditions and looking to make strategic acquisitions.

Contrary to the prevailing attitude of doom and gloom, these figures reveal that this is a golden period for business – for those investors and entrepreneurs who are prepared to see the bigger picture, take a calculated risk and back themselves.  As they say “a crisis for some is a blessing for others”.

What is an Information Memorandum, and why do I need one ?.

April 17, 2010

When I first start working with new clients, that are looking to raise capital or sell their business, this is almost always the first major obstacle we have to get past.

The Blog entry has been created to assist company owners in understanding what is involved in preparing an Information Memorandum (IM), during the process of selling a company or raising new capital for the company.

It deals with these 4 questions:

  1. What is an IM ?
  2. Why prepare an IM ?
  3. How should a company go about preparing an IM ?
  4. How is an IM likely to be used by investors ?

What is an IM ?.

An IM is a document provided by a company to prospective investors after the investors have reviewed a brief Investment Summary, or “teaser”, and signed a Confidentiality Agreement.

Some business owners and financial advisors look at an IM as a marketing document which provides a selective overview of the attractive features of a company.  In Australia this was the major criticism of Prospectus’ in the old days …. They were pejoratively called “The Glossy Bit in front of the Application Form”.

In most Westminster-based legal systems – notably Australia, US, UK, New Zealand, Canada and at least 20 other Countries, an IM by law must contain a full, true and complete disclosure of all information which may materially affect the value of a company.  NOTE to Company Owners …. You’re personally liable if you sell a business whilst withholding information that would have affected an investor’s ability to come to a different conclusion about your business.

However, IM’s are most often targeted at “Sophisticated Investors” who are not protected by the layers of regulation and red-tape that are applied to “Retail Investors”; therefore the law’s position on sophisticated investors is that they had the skills, knowledge, money and track-record to know better and if they lose their money then they understood the risks that could result ion that and still chose to invest.

A company and its advisor(s) must strike a balance when preparing an IM.  The document ABSOLUTELY is a marketing document, in the sense that it should motivate investors to want to invest in the company – but it needs to avoid hype, exaggeration, or omission, and provide a complete disclosure of ALL material facts.  Hype or exaggeration will only diminish the credibility of the company and its management in the eyes of investors, and may also create legal liability for the Directors of the company.

Why prepare an IM ?.

In general, an IM allows the owners of a company to present a comprehensive, accurate, and attractive picture of a company.

It’s also worth stating the obvious here – Investors EXPECT an IM, if you don’t have one you almost certainly will not get anybody interested let alone get their $$$’s.

An IM also helps to ensure that all investors receive the same information.  This is particularly crucial when a seller is running a competitive process.  The more information that finds its way into the IM, the less need there is for investors to pose written questions, saving time for both buyer and seller.

From an investor’s point of view, a good IM demonstrates the professionalism and motivation to sell of the sellers, as well as the quality of the management—all important factors when deciding whether to invest in, or buy, a company.

How should a company go about preparing an IM ?.

Preparing an IM requires a high level of internal organisation.

The CEO or business owner should lead a small team of experts in the main areas (e.g. sales/marketing, legal and finance) that will need to be covered in the IM.

Deliverables and deadlines should be decided for each member of the team. When this process is complete, the final version of the IM should be reviewed by the owner, CEO, and all members of the team, to ensure consistency, completeness and accuracy.

When MSC prepares an IM, we generally aim to provide investors with details of clients, market position, operations, finance, risks …etc – information sufficient for them to prepare a non-binding bid, with an indication of the bidder’s valuation of the company.

As a sanity-check, the Seller(s) and their advisors need to ask themselves what information they would require if they were buying the company – using a company they know little/nothing about as their reference point.

Given the IM is designed to solicit a non-binding offer on the company, with valuation, the omission of one or more key facts may give a distorted valuation, and provides investor with an opportunity to renegotiate their offer – typically downwards !!!!.

How is the IM likely to be used by investors ?.

An IM is the most efficient way of providing a large volume of information about a company to investors.

Even though there may be one person or a small group of people performing due diligence on the company at its premises, there is also a need to communicate with a wider range of decision-makers (e.g. investment committees, boards, advisors) that may never appear on site.  The IM is by far the best way to do this.


In conclusion, a high-quality IM is critical when selling a company, it is in some ways the equivalent of a CV for candidates looking to get that next great job/role.

And importantly, you don’t get a second chance to make a good first impression.

If you’d like to know more about this topic – feel free to contact me.  I’m also interested in any comments, or experiences you’ve had either involving a good IM or a bad IM.

The Art of Capital Raising

March 29, 2010

I get approached all the time by businesses/entrepreneurs/inventors looking to raise capital, and not understanding that they’re nowhere near ready to go chasing VC/PE/HNWI funds and particularly the current state of the business is best described as “uninvestable”.

So, before we get into the guts of this the very first thing we have to work out is “Are you, and your business, INVESTABLE ?”.

Determining Investability.

To determine the answer to this, you and your business need to be able to pass some important tests:

1. Is your business in a sector/industry/area that can support rapid, and sustainable, growth ?.

2. Can your business achieve a significant size and scale within a maximum of 2-3 years ?.

3. Can your business achieve much higher profitability than equivalent (eg: Competitor or “benchmark”) businesses ?.

4. Do you have the right team in place to make 2 and 3 above realistic ?.

5. What results do you have, in this business or previous businesses, to be considered a “reasonable bet” ?.

What Is The Best Way To Raise Venture Capital?.

[1] Get off to a “Smart Start”

  • Have a simple company structure, with a sensible number of investors (more than 1 but less than 10).
  • Have your employees, consultants, contractors and advisers engaged with well-documented agreements.
  • Get your intellectual property well-protected.
  • Have your “seed investors” and any business loans properly set up.
  • Have good corporate governance practices in place, refer to my blog on this topic
  • Have the right Legal/Financial providers in place – preferably “brand names” even if not the absolute best in their field.

[2] Be able to tell a Good Story about your business

  • Know how to articulate the fundamentals of your business … all day, every day.
  • Have a good bio on your Team, and how they deliver results for you (and any incoming Investors).
  • What Problem do you solve, and/or what Opportunity are you exploiting.
  • What Technology are you using/creating, and what is it a solution to/for.
  • How can you deliver sustainable advantage (as/when the competition adapt).
  • What is your business model, and how does it deliver value to your Customers and Investors.
  • What sort of Partnership/Network/Leverage arrangements do you have in place to maximise your opportunities.

[3] Make Sure the Numbers Add Up

  • Demonstrate a solid grasp of your business economics
  • Provide long-term financial projections (ie: 2-3 years from now at least)
  • Have a tight near-term operating plan (the current Calendar Year and/or Financial Year).
  • Clearly capture your capital requirements, both in terms of $$$’s and what they’re for.
  • Look to set up a capitalisation structure over multiple rounds, as this benefits Earlier Investors who’ve had to take a higher risk than Later Investors.
  • Understand and Show your Levers of Profitability and Expense.
  • Articulate the Key Business Metrics are, and how they will be Measured.

[4] Find the Right Investors

  • Use (well …. prove) your sales and marketing skills in how you approach potential Investors.
  • Actively generate momentum and interest in your business.
  • Target your Investor contacts – go for the best ones first.
  • Don’t flog your business pitch all around town … Once you’ve had 3 or more knock-backs then everybody gets to hear about it and has to assume your business is a “dog with fleas” and won’t return your calls.

[5] Build Credibility with your Potential Investors

  • There are many factors that enhance/devalue your business. A number of them are covered in the following points.
  • Who your Customers are (assuming you’ve got some).
  • Who your Strategic Partners are.
  • Who your current Investors are.
  • Who your current Board members are (and you’d better have a Board in place).
  • Who your Advisers and industry experts are.
  • What your Milestones are for the next key achievements/targets within the business.
  • How well you’ve been meeting your Milestones in the past 12 months.
  • Being overly defensive about the business model, or the business results.
  • Blaming others for the inability of the business to meet its Targets.
  • Telling Lies that potential Investors can easily research (AND THEY WILL) to prove them untrue.

The Sorts of Entrepreneur Lies That Irritate and Turn Off Potential Investors

10. Our projections are conservative

9. Our target market is $56 billion

8. We have a world class team

7. Our average sales cycle is 90 days

6. We have no direct competition

5. No one else can do what we do

4. All we need is 2% of the market

3. We’ll be cash flow positive in 12 months

2. Our contract with Nokia will be signed next week

1. I’ll be happy to turn over the reins to a new CEO!

What is a Convertible Note ?.

March 27, 2010

When I talk with businesses the topic of funding is usually the first-cab-off-the-rank.

One of the most effective ways to raise the funds in the post-GFC world is through Convertible Notes.  When I talk about this, the first reaction from most people is “what is a Convertible Note ?”.

So, to stop that little record being played over and over, I now point people to this Blog entry.

Feel free to contact me if this is a topic of interest to you for your business, or you just want to know more about the topic.

A convertible note (or, if it has a maturity of greater than 10 years, a convertible debenture) is a type of bond that the holder (Investor/Bank) can convert into:

  • Shares in the Company they’ve put the money into, at an agreed value (per share); or
  • Cash, of equal value to the money they’ve put into the Company.

Either way, the Investor will receive interest payments on the way through at an agreed-upon annual interest rate and at agreed-upon frequencies.

In terms of exercising a choice (Shares, or give me my Cash back), this is the Investor’s choice and the Company must accept that choice whether it is convenient and whether they like it or not.

The types of frequencies I most often see are:

  • Quarterly in arrears;
  • Half-yearly in arrears;
  • 50:50 (50% up-front, and 50% at the agreed end-date);

Each type of frequency has a different risk profile for both the Investor and the Company, and therefore the rate of Interest is expected to be quite different because of the risk spectrum.

A convertible note is a hybrid security with both debt and equity features.

The Investor receives the potential upside of conversion into equity, at an agreed price today for some point in the future, while protecting their downside with cash-flow from the “convertible note” payments.

From the Company’s perspective, the key benefit of raising money by selling convertible notes is (hopefully) a faster approval timeframe than a bank can achieve plus a deferral of dilution of all the other shareholders (though it will be inevitable if the Company does very well).

In the present Australian market, private convertible note arrangements vary from a duration of 6 months to 5 years and vary from an interest rate of 10% to over 20%.  The massive difference in interest rates relates to the frequency of interest payments and the risk-levels that the Investor perceives the Company as being for them to get their entire capital back.

What is your Business Idea worth ?.

March 27, 2010

I get approached by inventors, and other people with interesting ideas, and the one question I get asked in these situations is “what is my idea worth ?”.

There are so many ways to say “Zero” as the immediate response, but let’s delve into why your business idea is – or is not – worth anything.

Why your business idea is not worth anything.

[1]        Is it a better, faster, toaster ??.

Because if it is – yes it probably has some value, but the next (even) better, faster, toaster is just around the corner.

Therefore, your window of opportunity to leverage value from your idea is very small, and sophisticated investors know this.  These investors would rather chew their own arm off if that’s what it takes to get away from you when you accost them at some function and start trying to convince them about your idea.

[2]        Have you tried to patent it ??.

If you have, at least you will soon know that answer as to whether your idea is original or derivative of an already existing patent.

If you haven’t … the first question an investor is going to ask is “why not ?”.  The implication being that if you don’t believe in your idea enough to spend the $$$’s to get a patent application then why should they spend the $$$’s.

[3]        This could be worth MILLIONS !!.

Yes it could be, but using Amazon/Google/Facebook/Skype/…etc as an example for your business idea just will not cut it.  Only 1 out of every 200,000 ideas will get even remotely close to something like this …. And why is your idea that 1 ?.

An investor would be better buying a lottery ticket than investing in your business idea with those sorts of odds.

Why your business idea MIGHT be worth something.

[1]        It is a BIG Idea.

This may seem obvious, but bear with me.

Why start a company that you want to turn into an emerging growth company if it is not based on a big idea?

In spite of this almost every day aspiring entrepreneurs are out there pitching ideas that are just obviously not big.  At best it might be a great feature for another product (and that has tangible value for an investor).

Maybe it is a niche product that people would pay for, but there aren’t that many people in the niche.

For serious investors who deal in early-stage businesses they need businesses with BIG IDEAS and HUGE POTENTIAL.

Why ?.

Because they need to see returns of not 3x or even 10x, but 30x or more-like 50x.

This is because out of every 10 early-stage investments, these investors anticipate that only 1 to 3 will be successful.

If your idea is just a feature or a niche product, I’m guessing it is worth whatever you can license it to somebody else (who can do it much better than you) for – it is probably not a truly investable proposition.

Don’t get too down in the mouth though, many worthy ideas make good money for their creators in just this fashion – in the software/hardware game OEM’s, Plug-In’s and other types of “features” are regularly licensed from one company to another and the company licensing it can make very good annuity income.

[2]        You Have Prove That You’re Not Just Making it Up.

Having a business idea is all fine and dandy, but can you prove that it works?

Investors in 2010 are just not investing in 2 people with an idea sketched out on the back-of-an-envelope.  They need objective data that points to how this idea can – and will – make money.

Now, this doesn’t mean that they need to see profitability or even revenues (not right now anyway).  But it does mean that they want to see that you have something that people are interested in using.

Some examples of this objective data:

  • Can you show adoption rates ?
  • Can you show a nice upward trend in hits to the website ?
  • Can you show a sustained upward trend in new users/subscribers ?
  • What are your retention rates for users/subscribers ?
  • Do you already have your patent approved ?

[3]        You Can Justify A Valuation That Has No Rational Relationship To Your Earnings Power.

This is related to the “big idea” requirement, but is more subtle.

In essence … “what is your secret ingredient”:

  • Is it a hot new technology?
  • Is it a rock star team?
  • Is it a revolutionary new business model?
  • Is it a ground-breaking mathematical algorithm ?
  • Is it a new way of solving a commonly-experienced problem ?

Basically, it is about how you can justify to a buyer that they should pay 12x or 18x EBITDA, but your competitors are selling for 6x or 7x EBITDA.  This is particularly crucial in those instances when you’re claiming an EBITDA that doesn’t exist yet (ie: purely forecasts, because you haven’t even earned a single dollar).

Feel free to contact me if you’re facing these sorts of challenges.

VC/PE Links I find really useful

March 27, 2010

I have lots of sites I regularly visit, for information/trends/research.  Here are just some of the ones that I highly recommend: | Private Equity in Australia | Resources For Australian Companies Looking To Raise Capital | News and Investment Information | Private Equity Media | Used to be called Tradevibes, a great source of information on emerging companies | Australian Association of Angel Investors Limited | Private Equity and Venture Capital Fund Links Directory | Australian Small-Scale Offerings Board | NSW Innovation Advisory Service | Australian Anthill, where Ideas and Business meet | Australian Private Equity and Venture Capital Association Limited | Balnave Capital Group | Business Innovation & Incubation Australia | Bessemer Venture Partners | Online Funding and Investment Matching Service | Great source of Business/Societal/Technological trends | Kennedy Needham Corporate Advisory | McKinsey and Co | Find Venture Capital & Angel Investors in Australia | Australian Venture Capital and Private Equity Directory | Venture Capital SA | Wholesale Investor | Pre-IPO Capital Raising & Venture Capital Solution