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Want to know What are our Private Equity Deal Killers?

By : Ziad K. Abdelnour| 27 May 2010
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As part of Blackhawk’s close group of family and friends; and to set the record straight, we thought we’d share with you the Classic “deal killers” that we encounter when reviewing the more than 2,000 business plans submitted to us on the average a year. By “deal killers” we really mean the generic statements for you to avoid when submitting your “Elevator Pitch”.

We hope this short list will better assist you fine tune your “Value Proposition” when approaching us for funding.

The solution seems to be to have a set list of deal killers and to stick to that list regardless. The problem of course is that you could miss great deals and there’s merit in looking at deals on a case-by-case basis. But we’re sticking in here to when in doubt, kill it, because you simply don’t need to take undue risk.

The following list is not exhaustive, but outlines a few scenarios in which we’d kill a deal in an instant.

1. There is no competition.

Perhaps no other company sells a product substantially similar to yours, but this does not imply a lack of competition. Any substitute product, process or service that satisfies the same need as your business is a competitive solution. Stating that no competition exists reveals either a lack of research or imagination on your part. We interpret the lack of competition as evidence that the market is undesirable or having need of consumer education. Such a statement is an instant deal killer for us.

2. The existing competition is (lazy/stupid/pick an adjective).

Denigrating your competition will detract from your business plan more than it adds. The statement offers us no insight into why your company will succeed against an entrenched company.

If the competition has failed to seize the initiative due to its organizational structure:

a. Speak to the lack of incentives implied by this type of organization.
b. Identify weaknesses in the competition that are difficult to change, as opposed to poor leadership, which is relatively easy to change.
c. Offer us information about the competitive landscape rather than invectives against existing companies.

3. Company founders have invested $X worth of their time in the company.

We like to see that the founders of an entrepreneurial company seeking funding believe in their business enough to make investment and personal sacrifice to sustain its survival, but do not confuse the two. While foregone salary represents an economic cost of the venture to an entrepreneur, it is not an investment into the business. Investment translates to “cash” spent for costs related to starting and developing the business. If you have spent a significant amount to do this, please make sure to include the figure somewhere in the financial section of your business plan. If not, you are asking for trouble.

4. Our channel partners will sell our product.

Making the sale of your product somebody else’s problem is not the solution to the marketing section of your plan in 9 out of 10 cases. Your product is competing with alternatives in your industry and others for your channel partners’ time, so the incentives in terms of volume, margin and strategic benefit (ability to sell corollary services) must justify their commitment. If your marketing plan is dependent on this strategy, provide compelling evidence that it is viable. If not, you haven’t done your homework and will most probably not get our attention.

5. Our projections are very conservative and we will break even or be profitable 1,2,3 years from today:

If you haven’t already generated profits and haven’t attracted enough clients to show us you’re actually running a business v/s just tinkering with ideas, you are most probably not fit for us. Track record for us is indeed key and we’d go on a limb and back an entrepreneur who made it big time and lost it all than funding someone who never generated profits and is still conceptualizing his/her thoughts. Ideas are a dime a dozen. Execution is all.

6. We will sell into the $X Trillion global (name any) market.

Incorrectly sizing the market gives us the perception that management lacks either the knowledge to assess who would buy the product or the integrity to delimit this statistic accurately. Business for us is “War” and the only way to winning is to be armed with the right “intel”. Short of that, you are asking for more trouble.

7. Absence of information regarding how funding will be used.

We like to know WHY you are raising capital. Most entrepreneurs seeking funding provide us with a dollar amount they are seeking to raise without any explanation of the use of proceeds. Make sure to provide a breakdown of where the dollars go. The devil is indeed all in the detail.

As the cliché says: lemons ripen early, plums ripen late. That is, if the deal looks like a lemon early, it probably is a lemon.

Looking forward to doing business with you and to continue being your resource for deals, capital, relationships and advice.

Your feedback as always is greatly appreciated.

Thanks much for your consideration.

Comments

  1. Thomas JandtThomas Jandt

    Some of these are good general points to review when evaluating an opportunity, but fairly elementary. I have been an investment banker and investment professional for 20 years and have built a career raising money for private and public companies. My niche was always to fund start up and development stage companies that were reviewed by me and analyzed by my staff of experienced fund managers and professional investors. If I were to have “killed” a deal just because of size, revenue or profits, my clients would have missed out on turning $4.8 million raised as a young investment banker in the early nineties into $489,000,000 by the year 2000. However, Ziad, you are correct in your fundamental approach on most aspects. This basic approach is great for initial screening I suppose, but to make things more effective and much easier considering the deal flow we have to look at (we also get hundreds of deals per year), we have joint ventured with a group that provides our private equity investment candidates with a “Fundability Assessment and SCORE REPORT”. If they don’t score high on this 1,000 question, 28 page comprehensive fundability test, we don’t waste our time with them. If they pass, they get funded 85% of the time. This eliminates time wasted reading business plans and executive summaries that you’ll just “kill” in the end anyway.

  2. Stephen A. DayStephen A. Day

    Ziad, You constantly amaze me. This list should be the basis of a book for MBA students. I am disturbed that MBA programs do not include realistic capitalization processes. May I add a couple more red flags: 1. No realistic exit strategy. Too often the founders fail to understand that their investors do NOT want their money to stay in forever. Stating that they will sell to their biggest supplier or competitor is not a plan; it is a dream. 2. Too long of product development: Often firms present to us products that require additional engineering….forever! When use of proceeds is strictly to get the product developed, without marketing or manufacturing included, then we all should run. 3. Overhead increases with growth, not decreases as many small business owners believe. Lack of cost factoring in adding layers of management for sales, marketing, accounting, HR, etc tells me that the current management does not have the ability to allow it to grow. 4. Lack of an existing board of directors made up of independent experienced business leaders, including some who come from industries outside of the core business. When we see a board of friends and family, we see someone who is afraid of receiving advice. When we see no board at all, we have to expect the CEO to be a control freak.

  3. Howard FeldmanHoward Feldman

    Ziad: You need to mention that most deals fall apart because the CEO/owner (or the investors already in the “deal”) are not realistic when placing a value on the company.

  4. Mike LeMike Le

    Ziad, this is a very insightful post. 3 years ago at an CEO Clubs event, Russell Cleverland, author of “Finding Midas”, talked about “Entrepreneur Leadership”, and the deal can be successfully or not mostly because of the personality of the leaders.

  5. J.K.J.K.

    Classic weaknesses of a business plan. I would add a few others: – No “A.S.H.”: Avarice, Shame and Hubris – any signs that top management of a company are acting with avarice, have no shame and no respect to each other or their audience, or too much hubris in their presentation, is usually a perfect recipe for disastrous investments. Investors have to stay away from these red flags. And while the above “Deal Killers” are applicable to late stage start-ups or companies closer to maturity, they definitely still apply to start-ups in their early or seed stage. Add to that what is known as F.A.C.E.S.: * Focus – is the business focused on a niche market? And does this market care? * Abnormalities – is there something wrong with Mgmt Team? Do we think they are the right people? * Capability – Do we have proof the product is realistic and can be built? * Exit – What’s the Exit Strategy (IPO – acquisition)? * Scalability – How scalable is this business regionally, nationally or internationally?

  6. Patrick RooneyPatrick Rooney

    Working with start-ups involves education of founders and I we appreciate your sage advice. I trust you will approve sharing this Blog link with others.

  7. Ytzik AranovYtzik Aranov

    Ziad: This is a good start of guidelines for seeking capital. Having done 7 Entrepreneurial startups (one took public, then private), the list is only a bare minimum of Deal Killers. There are so so many more that only experienced bankers, and yes, a savvy Entrepreneur as well, will know what to stay away from. So, my suggestion to my Mentees and Entrepreneurs is always to go get help to not only craft a solid Business/Financial Plan but to seriously brainstorm and dissect the model, the financials and the market research while creating the plan together with someone who will challenge everything and help shape the Plan(s). Only an experienced and successful Entrepreneur who has done this many times before will be able to help navigate these waters. As a savvy Banker, I can tell within 5 minutes if the Plan documents warrant a deeper look. That’s why EVERY Entrepreneur – no matter how experienced – needs an Expert Review and Strategist. All the Best! Ytzik Aranov http://www.corpxform.com

  8. Luke TognoliLuke Tognoli

    Thank you!! Very useful! We have a good idea, knowledge of our market and capability.. but we don’t know how to write a business plan and these suggestions are gold for us. May I ask you a question? 1. I can’t show you profit since I can’t develop the product. 2. I need a seed to develop the product from proto and show you profit. Question: where can I find the seed to show you I can generate profit? Thanks

  9. Deepakk PushakrnaDeepakk Pushakrna

    Thanks for summarising and sharing these basic, but so very important deal killers. One would and infact keep receiving the said answers in atleast 7/10 deals. This also gives all an idea as to how deals and every answer is looked/analysed by PE/VC’s Thanks

  10. George WalkerGeorge Walker

    Thank you, this is great insight. I have a lot of start ups for customers and potential customers, I see the same kind of Deal Killers when we are looking at taking them on or extending credit terms.

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