As Private Equity investors, we have the pleasure of learning about a multitude of different businesses; from legal finance companies to family-run gun manufacturers. Often we are introduced to these companies through an intermediary and most commonly, these folks will send a 1 – 2 page summary of the business called an executive summary or a “teaser”. In the past twelve months, Duane Street Capital has reviewed close to 400 teasers that have come in all shapes and sizes; some long, some as short as a paragraph, some with graphics and pictures, some in PPT. We thought it might be interesting to talk about the things that we look for in these documents we think makes a great teaser.
The Basics
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Business Description. Less is more. The best teasers are able to explain exactly what the business does to a reader having no prior experience with the business or its industry in 1-2 paragraphs.
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Financials. Apples to apples and more is better. I like to see 3-4 years of summary historical financial information adjusted for any acquisitions, divestitures, or other events that make year-over year comparisons difficult. Good teasers also include 3-5 years of projected performance. The best teasers include: Sales, Gross Profit, EBITDA, EBIT, Capex, Working Capital, and any other cash adjustments (+/-) to the income statement from the statement of cash flows.
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Industry Description. Again, less is more. The best teasers have a brief description which includes: market size (based on revenue), market share of the competitive landscape, segmentation of the market (high quality/high price, low quality/high volume, big business focus/small business focus, etc.), macro trends affecting market (impact of unemployment, etc.), historical and projected industry growth, etc.
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Offering. I look at this section to make sure I understand what a seller is trying to accomplish. If I cant answer the question, “why did [X,Y,Z] intermediary send me this teaser?” then the teaser has failed. The best teasers tell the reader that a seller is looking to retire, raise growth equity, take chips off the table, reduce their involvement, etc. And it’s always helpful to know "how much"; how much ownership is for sale (control, minority investments, etc.), how much time does the seller want to spend with the business post investment, how much capital is being raised, etc.? The best teasers clearly define the goals of the seller, both lifestyle and economic.
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Investment Highlights. This section goes by many names: Investment Merits, Rationale, Opportunity, etc., but the ultimate goal is to provide an investor with an investment thesis. This is the section that makes a great teaser. Investors are looking for a thesis behind which they can invest. Everyone is different, but I tend to look for competitive advantages, a growth story (often including macro trends in the industry) - a rising tide which lifts all boats, and a coherent “offering” section. If a seller says that they believe 100% in the business but want to sell 99% of their company and focus the majority of their time on another business, it’s a bit suspect. The very best teasers are thoughtful about the rationale for making an investment.
Other Tips…
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Less is more. Be thoughtful and try to get the point across in as few words as possible. Remember, investors are looking at hundreds of these per year (its like resumes, make sure the text is thoughtful and concise)
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Cash Flow! Almost invariably, intermediaries do not show capex or working capital numbers for businesses they are selling. A company that makes $50 per year on the income statement and needs to spend $100 per year in Capex to achieve this income is not a very interesting business, but without a sense for historical and projected Capex, how would we know…
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Non-Disclosure Agreement. If you are running a process by which an investor will need to sign an NDA, include it in the email that you send with the teaser. BTW, always include a soft copy of the NDA. Most PE shops will have some standard language changes that are a lot more efficiently inputted using track changes in Microsoft Word.
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Eliminate the pictures and graphics. Unless the product or business is difficult to describe in words and a picture will help the reader better understand the “business description” section, leave photos out of the teaser. As well, graphs that show revenue growth or EBITDA margin are not useful unless they simplify very complex financial information. In an effort to keep the document short and readable, eliminating graphics will save a lot of space!
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Don’t forget to include your contact info. Full contact info for all members of the intermediary team is an obvious must, but you'd be surprised by how many teasers forget to give the authors credit.
Posts
As an intermediary, my only disagreement here is that something are meant to be communicated in writing (where they can find themselves anywhere on cybersapce), where as others (why the owners are looking to sell, valuation expectations etc) should be communicated verbally. Hopefully, the PE firm and the intermediary has enough of a relationship to cover that gap and it is not just a random teaser lobbed over the wall.
ReplyDeleteThanks for your comment. I agree that certain aspects of a transaction are better communicated through in-person conversation. It is at the discretion of the intermediary to determine what information is sensitive or nuanced and what details will provide a buyer with a more informed view of the opportunity. As a buyer, I always appreciate the intermediaries whose seasoned judgment allows them to provide a clear picture quickly and efficiently.
ReplyDeleteThanks for the tips Andrew! Plethora Businesses is always looking for ways to better their communication with Private Equity Groups. We will keep this in mind. We look forward to working with you in the future.
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