Another option is to look for a company to buy, and partner with an investor to finance the transaction.
A “Deal Executive” (also called an “Acquisition Entrepreneur” or “Executive in Residence”) looks for a company to buy, and typically will step in as CEO. The role usually pays a modest retainer with the incentive of a finder’s fee and/or CEO role in the new company. To become a Deal Executive, you must demonstrate a history of successfully leading a company at the C-level, or as a direct report to C-level. You must also offer a deal thesis or letter of intent to the investor.
PE funds are primarily looking for deals, not executives. In order of “desirability”:
As a Deal Executive, you should approach PE funds with a well-articulated deal thesis and position yourself as the gateway to this investment. The thesis has to be scoped for it to be credible that you’ll be able to find the right deal. A good investment thesis includes a few key elements:
- Clear definition of industry, in terms of niche, size, geography, etc.;
- Transaction rationale consistent with the company’s growth prospects;
- Basic financial markets analysis – trading range, feasibility, etc.;
- Outline of value-creation opportunities and plan for pursuing them;
- Explanation as to why you and your team are ideally suited to lead the effort;
- Roster of 5-20 target companies;
- Status of discussions with targets (if any);
- Thoughts on likely exit (IPO, strategic buyer).
For any specific company, you should also present a Deal Memo, which should include all of the standard investment pitch components.
There are three main sought-after characteristics for deal executives, the “Three Cs”: Credibility, Compatibility, and Deal Catching.
- Credibility: To appear credible, and able to do the job, you should have previously held CEO-level positions, or have directly reporter to C-level executives. Ideally, you have 10+ years in your target industry or related market and 10+ years leading P&L, preferably also balance sheet experience. For additional credibility, it’s best that you have personal capital to invest to show that you have skin in the game. The specific amount of which should be proportional to your age: a 35-year-old is not expected to have the same amount of savings as a 50-year-old. Ideally, you would have a management team ready, corporate governance skills (board experience), as well as investor relations experience.
- Compatibility: To ensure mutual compatibility, your goals and incentives should be aligned with that of the PE or VC fund, as well as the timeline for realizing them and exit strategy. Naturally, having some personal chemistry makes not only for a more pleasant working environment, but allows for greater synergies to be realized when working together.
- Deal-Catcher: Deal-catchers are usually entrepreneurial and sales-oriented, with a willingness to relocate, if needed. As a deal-catcher, you’re expected to proactively seek to identify deals. You should also be financially stable, and have a supportive spouse, in order to be able to go without salary during the search for deals. Ideally, you would also have acquisition experience, to facilitate the process.
Partnering with operating executives is a successful strategy which is a focus for only a small number of firms, many of whom market themselves as search fund sponsors. U.S. funds whose core strategy is to partner with executives to execute a transaction and bring in new management upon investing include, e.g., Anacapa Partners, Broadtree Partners, Buy+Build Fund, Endurance Search Partners, Frontenac, GTCR, Housatonic Partners, NextGen Growth Partners, Pacific Lake Partners, Peterson Partners, Post Capital Partners, Search Fund Accelerator, Search Fund Partners, TDV, and Trilogy Search Partners. Another related strategy are funds which specialize in financing independent sponsors (aka “fundless sponsors”), e.g., Ingleside Investors, Peninsula Capital Partners, Prospect Partners, Tuckerman Capital. Lastly, we suggest reviewing some of the online markets of businesses for sale, e.g., Axial, BizBuySell, and MicroAcquire.
A few firms exist which specialize in working with executives throughout the process to help execute a transaction; their business model is in between an investment bank and a reverse recruiter. Among the players in this space are Blackmore Partners, Harvey & Company, Notch Partners, Ocean Avenue Capital Partners, and Orbit Partners.
PE fund / executive intermediaries have a standard process for executing transactions:
- Review the industry for feasibility by looking at market trends to identify any opportunities, conducting valuation analysis, reviewing capital-intensity requirements, conducting fragmentation analysis for opportunities to acquire smaller players in a given sector.
- Profile executives to assess candidacies, based on the three desired characteristics mentioned above.
- Source companies for the transaction.
- Source sponsors for the transaction.
The order of points 3 and 4 above is interchangeable, as an executive has two main paths to choose from in pursuing a transaction:
- Finding the company and getting close to signing a Letter of Intent, then pursuing a sponsor.
- Finding a sponsor and then searching for a company, where the executive screens for funds with a track record of pursuing executive-led transactions and interest in industry. This strategy is even more prevalent in larger deals.
Many companies prefer to sell to (new or existing) management, even at risk of a lower price than they might get from an auction. Primary reasons as to why that’s the case include secrecy, continuity, speed, lower investment banking fees, “dummy insurance” – as it is easier to keep a stake in the spunoff company, trust and / or proven competency, as well as having a relationship with the Board of Directors.
The process for completing a transaction has 5 main steps:
Step 1: Launch Relationship (2 – 4 weeks duration)
Reach out to funds that are in your industry and value your expertise. Hold initial meetings to begin the relationship and assess the investment thesis.
Step 2: Finalize partnership between executive and fund (1 – 4 weeks duration)
Refine the thesis with the other party and agree on compensation, economics and exclusivity. Background checks are conducted and a deal origination plan is formulated.
Step 3: Identify & Contact Opportunities (1 – 12 months duration)
There are two approaches to doing so. In the concept-driven approach, with an investment banker you will search for:
- Inefficiencies within a market, segment or industry;
- Ineffective processes;
- Outdated business models;
- Competition from low cost countries;
- Novel product, process, or ideas;
- Rollup opportunities of fragmented industry;
- Industry changes (read the trade rags).
In the opportunistic approach (network) led by the Executive, you can:
- Reach out to former employers, suppliers, customers, competitors;
- Reach out to investment bankers, brokers, accountants, lawyers;
- Attend conferences;
- Look for reasons why people sell.
Step 4: Evaluate Targets (up to 3 months duration)
Your key questions include:
- Can a deal be made?
- Can we interest investors?
- Can you “drive” the deal?
Step 5: Closing (up to 3 months duration)
When closing the transaction, finalize documentation and financing.
The table below summarizes the typical Economics for Mid-Market Private Equity Acquisition, for Private Equity Group (PEG), Deal Finders, Investment Bankers, and other Executives:
Recipient of Payment
|Transaction Fees||Capital Providers||0.5% – 3.4% of deal size*||PEG pays finder’s fee of 1-3% of enterprise value plus sometimes carry, to deal finder + buy-side investment bank (if any). (Company (specifically selling shareholders) pay investment banker seller’s fee.)|
|Company||0.2% – 4.4% EBITDA (median 1.2%)* **||Company pays outside board members for ongoing services (~$5k+/meeting + equity incentives)|
|Expenses||Company||Post-deal expenses, not pre-deal||Company pays PEG for post-deal expenses. Important for buy-side operating exec/investment banker to get PEG to commit to pay broken deal costs.|
|Investment Rights||–||–||Usually unlimited co-invest rights for executives involved, with no PEG management fee. Executives will, however, pay pro rata monitoring/other fees.|
This does not reflect compensation for an executive’s role as a company employee post-deal. Note that transaction fee and carry are inversely related.
* Robert Seber, Dechert LLP, “Transaction and Monitoring Fees: Does Anything Go?”, 2003.
** The PEG’s fund documents will generally discuss whether a portion of that fee (often half) is set off against management fees that the LP’s would otherwise owe.
Other data based on Akoya Capital, Oberon Securities, and other interviewees.