Yesterday I was having a conversation with a Managing Director from a mid-market investment banking boutique. He is a former entrepreneur who sold his business to a major multi-national in 1999 and then spent 10 years in corporate development with them. In 2009 he joined a boutique mid-market investment bank and has since closed two deals over the last 18 months. He told me, “If I do one deal every two years I can still make a good living, but it can take years to cultivate the right relationships to get in on a deal. From the first conversation I have with a company to the final sale it’s not uncommon for the relationship to last four or five years.”
He then told me about a recent deal he had closed. Parties have agreed on a LOI. Years had been spent nurturing the deal and all that was left was comprehensive due diligence, which required setting up a virtual data room. But because the investment bank has a policy of letting the virtual data room vendor negotiate directly with the seller, there were unexpected delays. He said “It took 2-3 weeks for the seller to come to an agreement on a data room license. They debated the fine print of per page pricing and the cost of additional users for a data room that ended up costing them $10,000. I couldn’t believe it. You work for years to get a $50m deal to this point, and key stakeholders who stand to make millions of dollars then spend weeks haggling over a $10,000 data room. Delays are risky, because they increase the odds that something might kill the deal – another opportunity might pop up and distract the buyer, one of the party’s earnings might come in lower than forecasted, or sovereign defaults might lead to a liquidity crisis and dry up the financing. Any of number of things is possible.”
I mentioned to him that Firmex has over two hundred investment banks on an unlimited use subscription or a pay per deal agreement where they pay either an annual flat rate or fixed price per deal. With our pricing model the seller knows what the price will be well ahead of time, and there are no variable fees for the number of pages or users. This way, deal time isn’t wasted on negotiating tiny details for a data room and you eliminate any risks that a delay might cause, and then when the LOI is presented all parties can move forward immediately. Because there is no incremental cost for our subscription, investment banking clients often set up the data room ahead of time, and once LOI is signed off, the data room is opened up to users within hours. Why burden the client with buying a service they have no experience buying? Why risk the delay? The investment banker put it this way “Deals are like Sharks, if they don’t keep moving, they die.”