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Now, back to the episode.
Welcome, everyone. Welcome to From Angel to Exit. I am Bruce Afelt. I am your host. Our guest today is Frank Williamson. He is the Founder and CEO at Oaklyn Consulting. We are going to have a really interesting conversation today, not only about the whole growth and exiting process, but also what happens in some of these portfolios when you have assets that are not performing as well, and we kind of need to figure out what to do with them.
I think it is going to be a great conversation for folks who are thinking about exiting and really kind of understanding the other side of this. When you are dealing with private equity, and you are dealing with funds that are supporting or buying into these companies and becoming part of the portfolio and have expectations, what happens with those expectations as companies kind of perform or do not perform? So I am excited for this little bit of inside baseball here on what happens on the investment banking side. I am excited to have the conversation. Excited to be part of the conversation with Frank here, to kind of get into this and understand the history and some of the options.
With all that, Frank, welcome to the program.
Bruce, it is great to be here. Thanks for having me.
Yes, it is a pleasure. Before we dive into everything we are doing today, let us talk a little bit about your background. What is your background professionally? How have you gotten into this space? Give us a little bit of the backstory.
Okay. Well, I have been in some form of investment banking for my whole career, which is 30 years or so now. Starting out doing an analyst job, going to do public company work, spending some time completing some deals for a venture-backed company, running a traditional boutique, and then for the last eight years running Oaklyn Consulting, which is a sort of specialized kind of M&A boutique.
Yes. And give us, just so people understand your role as an investment banker. I mean, I always kind of joke that it is really not about investment or about banking, but what do you do? Practically, what are you doing with these companies? What does the job actually look like?
That is a great point. I think the thing to keep in mind, as most of your founders know from raising capital and from selling or buying companies, is that it is a complicated year-long negotiation with multiple offers and counteroffers. What investment bankers do in that context is help project-manage that long, involved negotiation, especially focusing on its financial aspects.
Yes. And any particular kind of focus, either in terms of industries or situations or sizes or geographies? Where have you mostly operated?
Well, the reason we formed Oaklyn Consulting was to serve a part of the market that was not being well served. That is relatively small, relatively complex deals.
The normal way investment bankers work is they charge a commission at the end of a nine- or twelve-month project. If they are smart about their own business, they are very careful about who they take on, because you need a deal that closes on time and isn’t a time sink. We build time into deal fees so we can help the part of the market that is not otherwise well served. That is our world. Smaller, more complex deals usually mean more social issues.
Okay. I always found, with my own company and certainly with several clients I have worked with, that if you are under 50 million, it is just tough. Bankers want to work on bigger deals because they are taking a cut. It is the same amount of work selling a 100-million-dollar company as it is a 10-million-dollar company. I would rather just go find a bunch of 100-million-dollar companies. What is that kind of size like when we talk about it? I do not know if you have any models for structuring company size and how deals end up working. I mean, I know we go everywhere from a business broker all the way up to big M&A shops doing billion-dollar deals. How do you stratify the market a little bit?
I think that 50 million as a cutoff for enterprise value is a pretty good place to be. There are many people serving the middle market or lower middle market who want to cap their project revenue at 800,000 or 1 million dollars in fees. If they are being smart, they are probably discounting that by half for risk. They are saying, “Well, I need to make some yield on my time to get it done.” And you are absolutely right, it is about the same amount of time regardless of deal size.
Business brokers create value a little bit differently than investment bankers. They create value by identifying the owners of relatively small businesses who want to sell and listing them in places where buyers can see them. That makes it much easier for a buyer looking to buy a business, rather than calling everybody at any point in their career to ask if they want to sell. They are operating a business that looks a lot like a real estate listing service.
If you think about people who call themselves M&A advisors or investment bankers, you are doing something that looks more like a real estate auctioneer. You are trying to get multiple people there at once to make a bid, and you are reaching out to find people rather than having the company show up at the watering hole where people are looking to buy.
Yes. You kind of make the market rather than just plug people into an existing market. I am just curious, what work actually goes into this? What is the actual heavy lift for an investment banker in terms of finding potential suitors and managing the process? What is the hard part?
I think the big thing that people cannot do themselves is the role of being a sherpa, for lack of a better term, down a year-long journey. The whole thing is a negotiation from the time you first raise with someone, “Hey, what could we potentially do together?” until the deal is done.
The hardest parts of that negotiation are having more than one choice at the same time. Do you have more than one buyer? Do you have a buyer plus a good no-deal option? You actually need choices.
The next hardest part is keeping the thing on schedule rather than it becoming a forever conversation about how we could theoretically do something.
The third hardest thing is once you have done all the work to negotiate a business deal, preserving value from the letter of intent and the business terms to the closed deal at the end, and not having the buyer nick away the deal you thought you had.
Having someone who can see that journey ahead of time adds a lot for the typical founder. Partially, that is what the investment banker does. They are the guide for that journey. Second, they are the financially minded person who deals with buyer types regularly. They know the questions a rational buyer needs answered, and they can help you get your story in order so the buyer can make a quick decision.
Yes. This is interesting. I talk a lot about what drives valuation and what makes a company viable. There are some companies with great fundamentals and opportunities, but they are not organized or presented in a way that a buyer can see them. Sometimes structural issues prevent a sale or make it so complicated that buyers move on. What are some key things earlier-stage founder CEOs should think about in terms of driving valuation and saleability?
That is a great question. When we talk with people, and this does not apply to people who have raised outside investment already, if you think about owner-operators, there are a lot of great jobs that are self-employed jobs. They look like a company, but they are a job.
That is a lot of what business brokers are selling as well. It is an opportunity to go do a job. You buy your way into a set of customers and a brand, but it is really not a company you are buying. It is just an opportunity to have a job.
One thing to consider is whether what you are running is a job or a saleable product. If it is a job, use your profits to pack away savings and happily dissolve it when the time comes. Do not sell it, just wind it down.
If it is a saleable thing, think about the concept of being an owner-operator and start to get clear on the owner role and the operator role. The owner gets to sell the business. If it is just you wearing that hat, it is you in the owner role who chooses to sell the business, and when and how to do it. In an ideal situation, the operator does not totally know or care.
That is the extreme example, but if we picture you or me trading a share of Apple, it does not keep Tim Cook up at night if we rotate ownership. That is the big extreme. In small companies, things are mixed together, but the people who really get good at selling businesses separate the owner from the operator intentionally.
Yes. I always say one test I give CEOs is this: if we put you on a two-week vacation where you cannot talk to anyone, what happens to your company? If it dissolves, you have a job. If it keeps running, maybe you have a saleable asset.
Let us talk about the case where you now have investors. You have raised capital, you have a cap table, and people have invested. If someone invests in a company, they need to get their money out at some point. How are those expectations set? When you work with companies with a cap table, what is the process by which expectations get set about return of capital and time frames?
It gets set by the security people who are buying into it. There are lots of local investors who back, for example, restaurant owners. They put in some kind of security that looks sort of like debt, and they expect to get cash back over time. They are not looking for a big hit ten years from now, when they declare victory and are out.
You can think about that kind of angel. They are looking to build a great business and then get redeemed out. Those are wonderful sponsors of small businesses across the country and around the world. They are primarily looking at an annuity or a distribution stream over time. They want the original cash back, plus something else, like principal and interest.
Then there are people investing in a company intended to be a saleable asset. They are not looking for cash back over time. They are looking for a sale event in some future year. That means, from day one, there is discussion about building a company that fits into a larger organization’s operations.
In rare cases, it might be an IPO, but most founders building for an exit are exiting through an acquisition. They realize equity value in a payout, potentially with retained equity or an earnout, and investors get cashed out based on that transaction.
How do you see the difference between venture capital and private equity in practical terms?
I think of angel or venture investors putting money into sales and marketing. In mature cases, they are funding a formula: if I put in this much marketing spend, I get this much more in client contracts. You see that often in software businesses where customer acquisition cost and lifetime value can be calculated.
Private equity, also called buyout, is the purchase of a cash-flowing business using as much debt as possible. They focus on changing ownership, running the business well, maybe doing add-on acquisitions, and then selling it again later after paying down debt. Their cash is not funding sales and marketing.
There is a third category, often called private equity, where you sell to a larger business owned by an institutional shareholder. In that case, you are just selling to a bigger company.
If I am running a professional services firm doing 20 million in revenue and growing, what are my options?
You probably have three options. Venture capital likely is not one of them. First, an investment fund if you have hit maturity and separated the owner and operator roles. Second, selling to a larger, strategically adjacent professional services firm. Third, a financing structure that enables internal management to buy out departing owners, often financed over time.
The predominant scenario is probably a bigger organization that is strategically adjacent to what you are doing.
Now, let us talk about what happens when things are not going as expected.
We do a lot of work in the early-stage venture community. The rule of thumb in venture funds is that one or two investments out of the whole fund drive returns. Maybe 10 to 15 percent go to zero. That leaves many in the middle, neither taking off nor going to zero.
Investors have patience, but they are momentum players. The companies with momentum get attention. What probably happens first is some level of neglect. Then a more tense relationship develops.
For example, if you hire a sales leader from a big company and it does not work out, you may fall two years behind projections. Now you are at year five or six, when you thought you would be four times bigger, and you are turning over leadership. Everyone is tense.
The first thing is not to let that tension get you down and not to engage investors in fantasy. There is no investment banker role in that emotional part, but it is the founder’s reality.
Investors’ job is to get their money back. Have patience and empathy for the money person. They probably have investors behind them. They need an answer on how the money will be returned.
They will ask for a better answer than last time. A better answer is more specific about whom and, if possible, when. It does not have to be six months from now, unless you are burning cash, but it should be specific.
If you think someone might be interested, you should have taken steps to build a relationship so they can see the value. If it is adjacent rather than competitive, you need to get out to potential acquirers, not with a “will you buy my company” message, but with “what can we do together that creates more value?”
Ideally, there is revenue behind that in the short run and a sense of tighter collaboration.
What does not help is saying there are five potential buyers, but you have not met any of them. Or saying you suspect some people are out there, but do not know who.
Make a list. Treat it like sales. Qualify prospects. Talk to them. Find ways to collaborate. You can do it yourself, and you should.
How do you approach those conversations?
There are generally two avenues into a bigger company. One is through divisional or product leadership. The other is through finance or corporate development. If the company is owned by a fund, contact the fund.
Ultimately, once it becomes a deal discussion, finance and divisional leadership intersect. Corporate development will take it to divisional leadership, and vice versa.
If you are close to an exit, you might involve an investment banker. If not, money-oriented investors can reach finance, and the founder can reach product or divisional leadership.
What makes those deals work?
Creating urgency. Sales is a good analogy. You uncover a need urgent enough for action. Once it becomes a sales conversation, you only get to sell once, but you can create scarcity by having multiple conversations going on.
Sales go better when the top of your funnel is full. You need more than one conversation.
How does this play out at the board level?
Early in my career, I staffed corporate development for a public company. Every summer, we review M&A deals in the marketplace, our stock valuation, and our plans. We asked whether shareholders were better served by selling now or not selling.
That decision is about relative value. Are we better off with a transaction now or later? Owners must project future value and discount it back to present value.
There is also the investor’s own needs. A fund may need liquidity regardless of company performance. They may be at the end of their fund life and need to close it down.
In distressed work, there is no catalyst like a distressed owner. It may have nothing to do with company quality. The owner may simply need money or an exit.
Being sensitive and empathetic to investor needs is important. Sometimes it forces a change in ownership, ideally without disrupting operations.
Frank, this has been a pleasure. If people want to find out more about you and your work, what is the best way?
Our website, oaklynconsulting.com, is the best way. There are client stories and articles with tips and tricks. Reaching me through the contact page is also great.
Great. I will make sure the links are there. I have looked at several of the articles. Really good stuff. I highly encourage everyone to check it out and download the information. There are good case studies and good details there.
Thank you, Frank. It has been a pleasure. Thanks for being on the program today.
Likewise, Bruce. Really honored to be here.