Finding the Right Financier for Your Company

Why your banker might also need to understand engineering

16 October 2013

Photo: iStockphoto

Engineers are a rare breed, and I’m glad I got my start as one. Not only did it launch me on a solid career path, but it also gave me important critical thinking skills that have served me well in different roles. After I received my electrical engineering degree from Kansas State University, I started my career as a technical sales engineer for Texas Instruments in the Washington, D.C.-Baltimore area selling digital signal processors, development tools, and Voice over IP software stacks. I can’t tell you how many times I’ve given a technical demo or talked about processors in front of skeptical engineers, answering their tough questions. Engineers always demand honest answers backed up by facts.  It’s tough to give the runaround to an engineer. 

After about 15 years in the industry, including some time at startups and owning my own business, I decided to embark on a different type of career in investment banking, specifically as a mergers and acquisitions (M&A) advisor for technology companies.  Basically this means we act as the intermediary for the owners of a business, help them find prospective buyers or investors, negotiate the terms of a sale and see the deal through to closure. I enjoy this side of the industry, working mostly with business owners who are engineers, and bringing a unique perspective to the process of positioning and selling a technology business. I always like to joke that I am probably the only banker who’s ever debugged a board or a network.

If you are an owner of a successful engineering company or just hope to become one someday, the process of raising capital to launch it or eventually selling the company can seem daunting.  While we were studying how to design circuits or write code, nobody told most of us how to run a business, raise capital to grow it, or even how to go about selling it. That experience comes from a combination of learning on the job and surrounding yourself with the right kind of advisors. 

The trick is figuring out where to go and who to talk to. For example, if you were to seek to sell your business or take on an investor, selecting the right advisor can make a big difference in the price and terms you receive. Nowhere is this more acute than with “highly technical” engineering-oriented companies since many financial advisors don’t quite understand the underlying technology enough to represent the company properly to buyers.  This can result in not receiving the best price and terms for the business, whether selling it outright or raising capital to keep it going.

Of course I am biased but I have to say that there is an advantage to hiring a financial advisor or banker with the knowledge and expertise in the technology.  Your company may have experts in digital signal processing or radio frequency design but oftentimes those with technical backgrounds don’t spend a lot of time thinking about how to position the company for maximum business value to an investor or buyer. Good advisors can help you navigate those issues and best position the company.

From my perspective, selling a traditional bricks-and-mortar business is a lot easier than selling a company that produces highly technical and highly differentiated products and services (but not as fun).  For such traditional companies, you’ll find a buyer who wants the revenue and profit stream, contracts, and workers in a particular customer base. For this they’ll pay some sort of industry standard multiple of earnings, which when selling a business is typically defined by earnings before interest, taxes, and debt (EBITDA). But selling a company that is highly complex requires a lot more detailed knowledge about that segment of the market.  Regular multiples of earnings often don’t apply for highly specialized businesses. If your company provides software tools that run on ARM microprocessor cores, for example, you certainly wouldn’t hire a financial advisor who doesn’t have any idea what it is, does, or who uses it.  You would hire someone who knows that ecosystem, understands development tools, and yes, understands finance too.  

So what should an engineer who wants to sell a business look for when hiring a financial advisor? First are the items on the basic check-off list. Do they understand how to get M&A deals done? Have they done deals with similar companies? If you are working with a bank, make sure you pick one that is not too small but not too large. You want a large enough firm that has the resources to support you, but small enough that it views your relationship as important and worth their time. Bankers don’t make their money unless the deal closes, except for a small retainer, so finding the right fit with a motivated partner is important.

Another tip: Don’t necessarily choose the bank that quotes the highest value range, which is what prospective bankers decide your company is worth. Some bankers may give you an unrealistically high potential valuation. They may be doing this to flatter you into agreeing to use them, which, if too aggressive, inevitably leads to disappointment. Remember, ultimately the market sets the valuation, meaning the value of the business unique to an individual strategic buyer (bigger company), financial buyer (private equity), or growth investor (venture capital). You want to work with a bank that gives you honest advice and a range that it can back up with facts.

Do you have questions about financing or selling your technology company? Use the comment section below.

Brent Lorenz is the vice president of The McLean Group. He got his start as a technical sales engineer for Texas Instruments.

 

 

 

Learn More