Please Advise- My Fintech is about to get client: how to proceed and eventually land PE clients
I'm working on starting a fintech idea. Its copying a couple start-up ideas I've seen before in Canada and fusing them together, beginning to focus/target at lower middle market firms & small businesses. Open to any & all feedbacks. Apologize for the long post.
Private debt:
First idea, product/service line is matching firms seeking new loans or to refinance current loans with non-bank lenders. With rates falling now, in Canada at least this may be less attractive but believe over long term believe still has a valuable value proposition.
These non-bank lenders focus on lending to SMEs and have referral partnerships that will pay ~1% of loan as a finder fee. The software would allow SMEs to make a profile with their info, including the type and size of loan they are seeking and some financial data to then be matched with non-bank lenders they meet the initial criteria for.
The start-up that is currently doing this is very young, just under 4 years old. They only recently got 1,000 SMEs to sign-up for their platform, they made a post about it. Want to note its not 1K firms that got funded but just made profiles-over almost 4 year. Feel they haven't captured a very critical amount of market share. This year a second competitor just entered as well, but the market seems very young.
No licensing required. Saw neither of the firms had any licences, they both raised low seven figures in VC money. Turns out as it is a business loan between a firm and an entity in the businesses of making business loans, it does not constitute a capital raise nor a financial security-double checked with regulators talking with them directly and they are said earning commissions on this without licensing is fine and does not violate any regulatory laws.
While those two competitors are VC backed, it seems they are going to burn through money fast, they both have downtown offices in remarkably expensive areas and many full-time devlopers in Canada and feel with VC backing are not aiming for profitability. Feel I can copy their model with much lower costs and being more lean. I have family and friends that are developers that can make a functional software that can do the same make profile -> enter in database -> match based on filters function. Believe the key is a good interface and usability.
Worked at the start-up arm of a boutique investment bank for an internship. They would collect retainer plus commission on EV value for strategics and PE firms for doing outreach/business development on middle market targets- or a finders fee structure with no retainer & higher commission. They would do research to find middle market, typically lower-middle market to lower-middle middle market firms, outreach to founders to see if they're interested in partnerships and then gather info to send tear-sheets and see if the client was interested in a meeting, if the client meets with them they pay x% of EV if the client or one of their portco's buys or merges with them in X # of years. Their clients included many PE firms including mega funds and very large consolidators. Learned a lot that summer. Everyone below mentioned would be too small of a deal size for them.
I recently saw there was an American PE-backed firm doing consolidation in this blue collar service in my area, not HVAC but lets say not to far off in home/property services. I did some cold calling and found a decent number of founder owned or family owned firms looking at a sale in the near future, but were still a ways out from hiring a broker or posting listing.
I called one medium sized company in the big city in my area, talked to the founder after finding his cell online after some deep digging-very friendly and open guy. Said he was approached my the PE guys as an add-on/tuck-in, unsure of what to do, kept saying he's always open to new ideas that made sense including buying firms and expanding outside his current service area.
I cold called him described very vaguely I wanted to help him buy companies in his industry & area if he's interested, he was in a noisy place but, said he's very interested and said to text him. This was around 5:30pm. At 8:30, I hadn't texted him yet and he called me and we talked about it much more, told him how my business model and services worked.
I told him I had a pipeline of firms willing to transact that weren't at the posting listing formally going for sale process. Explained EBITDA arbitrage and said he could do that then sell in some number of years for more he liked that idea. I asked, as the topic came up at one point about his size in top-line and EBITDA and he said he'd be happy to talk that later under NDA. A few days later I sent him the NDA & told him I had been doing more outreach and he'll be excited to see the progress and asked when he could talk for an hour next week. He sent it back signed in under an hour but yet to reply on times to meet next week, its been a few days now.
His firm has an established reputation over decades in both residential and commercial, his service area includes the big city and northern suburbs. I'm estimating his firm, looking at size and many thing has ~$1.4-2 mm in EBITDA. Estimate it sell at 3.2-4X to EV. Want to note, economies of scale are possible in this sector and quantity discounts are possible on critical materials to lower costs and the PE platform in the area is starting to try to undercut competition is offering sales.
I proposed he could use EBITDA arbitrage, buy some retiring firms in or out of his service area, if there EBITDA is around ~$500K he could buy a number of them for about 2.7-3X EBITDA, they're too small for PE firms to buy even as add-ons or there are so many add-ons they can do. By the time he'd done in a few years could then sell the whole package for at least 4-5X. Mentioned my experience, what my service would be: doing the outreach, scanning to see if they meet their criteria for acquiring (service offerings, revenue, margins, size) for 2% of EV. He seemed to like it all. Its a way to find firms to acquire that are willing to transact, before they list for sale that match the buyer's criteria is the simplest way to describe the service.
I've gathered in a week 6 decent looking well established, high ratings and number of reviews on google, home stars and the BBB that are founder or family owned businesses well established ~20+ years old, open to a sale but not listed in both commercial, residential and a mix of both. After the cold calls, all buy one going on vacation now, its end of July but have several on the books/outlook calendar coffee chats with him in 2 weeks. The other said call me back in a month, have to decide with the family if the next generation is sure this is what they want.
One of these target, are outside of the potential client's current service area, but in another region of suburbs the client says they are interested in growing into-the area I live in. This target/founder and I talked for a while on the cold call, didn't know what EBITDA was, discussed EBITDA, EBITDA Multiples and EBITDA arbitrage, sent him articles on them after our call. We are setting up a date to grab a coffee in person. He said he'd ideally like to retire within 2-5 years still wants to grow a bit more & keep working. after talking he'd be open selling a portion of equity-possibly a majority stake now, enjoy the liquidity and the quantity discounts on costs and then sell his remaining ownership at ideally a higher multiple-they'll have better margins by then he'd be selling in a bundle of higher total EBITDA if a strategic, my client (didn't mention any of their names to each other at this point) bought that majority stake and also wanted to sell later.
All but one of those 6 mentioned above are in my area, that same group of suburbs nearby each other, multiple in the same town. All but this one founder want to fully-retire, so having this one guy stay on would help as they have ~20 years experience operating in that region-making the idea of expanding into that market easier for the client and that target would have the right incentives to ensure growth/good performance.
Didn't mention this before but have I have good relationship with a few minority stake PE funds in the area and their senior staff that like to invest in conservative industries like this in LMM firms. I've sourced some stuff to them prior, not for monetary gain (regulators would crucify me if I got commission on that) but for relationship building/networking with them and just cause why not, that were not funded but I was told they were respectable and were seriously considered. Perhaps they could finance some of my hopeful-client's add ons and exit with them.
Also, could cross sell with the frist service offering above, offering and source some of the acquisition capital to those non-bank lenders if only for smaller amounts in a second lien or mezzanine position, but only if it makes sense numerically for everyone-not going to push that if its illogical for the deal(s).
Also not buy-side but currently there is small 4 location pharmacy chain in a small town, trying to help the boomer founder sell, was introduced through mutual contact, estimating his EV is ~$1.2-1.6 mm. Doing more sell-side stuff, turning their quick-book records into a CIM and have been introducing them to pharmacy consolidators. Harder to sell as its a really small town, the founder and family make-up ~10% of staff. Thought I can use the money proceeds form that sale to reinvest in the business and also have some more credibility to my brand.
If this current hopeful client doesn't sign, got a few similar firms that said they were interested in buying competitors and said to follow-up in a few weeks (everyone seems to be going vacation right now).
Feel really happy with the success, have called/emailed ~100 firms so far. Any advice on how to advance and succeed would be greatly appreciated. Last contact with potential client, sending and receiving back the NDA was Thursday mid-day now-time of writing is late night Saturday.
Down the line-I have another colleague/mentor figure who is a co-owner and board member of this one tech firm. They are 10 years old-mature and profitable. Believe, just based on comps and all else their EV should be mid to high seven figures. Have known each other for several years & they were a mentor in a public/not for equity incubator I was a part of where I worked on this idea. They liked the idea as well. This person said their firm was looking to sell some time next year.
I set-up a meeting between this person and my buddy who worked at the boutique that was the parent company of where I worked. Want to clarify the parent firm of where I worked was typical LMM sell-side shop and they had people who's full-time job was working on a funnel of operators of LMM to get those clients when they sell, one of those people is a buddy of mine who I stay in contact with. The two of them hit it off and the co-founder set-up a meeting on the books with the CEO/majority owner of the tech firm and my buddy but Mr.CEO cancelled the meeting last min stating they have a good number of M&A contacts and not looking to talk about a sell-side process at this time. Co-founder friend says team is really just focused on one last heavy push to grow at the moment.
There is a fairly similar tech firm also in my area that got bought by a US PE firm as platform next year. Once my friend's tech firm sells I think they'd make a great add-on for them. In ~4 months I wan to land them as a client. Know a few people that are employees at that platform but lower level, also know and some VC folks, above associate level who I have a good relationship with that used to be on the platform's cap table pre-acquisition-same c-suit now. Also the owning PE shop has only a single person doing business development/originations. They have this one tech platform but most of their portco is blue-collar american.
One of their managing partners is Canada and went to a canadian business school. Another plan of getting in is I have another buddy who works at one of Canada's largest wealth managers for HNWIs, has multiple locations across Canada. This buddy expressed an interest in joining my firm, he went to the same business school as the mentioned managing partner and lets say there school is very target and good reputation for having a very close alumni network.
My goal is to get this US PE shop of at least their tech platform in Canada as a client in ~4 months, hopefully tech in my co-founder buddy's shop into them. If not that target another one and then start having mainly PE clients. In 4 months my website will be more developed and hopefully I'll have some LMM transactions completed and a track record.
Notes:
not planning to charge retainer at this time
regulators said M&A advisory was under an exception in federal law so no license required, showed me the exact law so again told me what I'm doing is fine like on the debt side.
