WSO,
This is a discussion regarding a specific situation I am in that is grey with regards to compliance, payment, and disclosure. I am need of some collective thoughts / help from the investment banking community.
In December last year, my cousin, Co-Founder of a $20mm revs $2mm EBITDA business, called me up and asked for some advice on hiring an investment bank to sell a majority stake in his business so he could cash a % out and receive growth capital to launch the business into $4-$5mm+ EBITDA territory. I reviewed the small boutique he chose and their engagement letter, which included an egregious clause stating if he signed an LOI with any party within 12 months, whether that party was introduced by the bank or not, the bank would receive their full $250k or 2% transaction fee. The bank ran a subpar process and generated two offers my cousin considered a joke and no communication has occurred for 6 months.
Fast forward 6 months later and by way of immense chance, I am sitting in the Managing Partners office of a multi-billion PE fund discussing an entrepreneurial venture I was interested in. My cousin operates in the same industry as my venture so I happened to mention him somewhere along the discussion. Long story short, I introduce them on the spot and it turns out my cousins business is a great bolt on oppy for a platform company and they submitted a generous LOI.
My cousin is now asking my thoughts on if I can be engaged as the advisor, and/or collect a finders fee and transaction fee. I am a first year associate at a small PE firm now, but believe my Series 79 from investment banking is still valid.
Ive already on the back end negotiated changes to the LOI and backed into a larger purchase price and optimal working capital investment, realizing an additional $2mm each for both co-founders without sacrificing ownership %. We are now working through the decision to bring me to the management meeting and engage me in diligence, as I have not only sourced the deal but have also added value in the negotiations thus far. As of now I am operating as a ghost on the back end.
So questions:
1. Can anyone envision any compliance issues with advising on the sell side for a $25mm private transaction while working for a small PE firm? Note the buyer intends to keep everything 100% confidential as to not spook competitors. Technically my PE firm is SEC register as we are a registered investment advisor
2. Is there a way around the clause in the IB engagement letter? I believe as it reads today, if they close this transaction by December, the Bank gets paid $500k even though they did absolutely nothing and I did everything. Note the buyer claims the bank would never know the company was sold.
3. Is there any issue with collecting a finders fee or transaction fee for this as an independent? Series 79 licensed still. Just not sure how that would work. To that point, the idea of a gift from my cousin was brought up as a tax efficient and legitimate way to pay me.
4. How much should I be asking for in this? He was basically dead in the water for a sale and is now walking away with $6mm cash in his pocket, with 36% ownership post transaction. I was thinking $200k. Most deals of this size the banker gets between $500k-$1mm though.
5. On point 3 and 4, is it possible to run it through the company as a transaction expense alongside the typical expenses for legal, QofE, etc?
6. Do I tell my existing firm I'm doing this on the side? I think the answer would obviously be yes, but, I have no Employment Agreement that dictates what I can and can't do outside of work or that I can only focus on my work at my PE firm. I once was looking to invest in a small rental property and asked my partner if it was ok just to check the box as I would be working on it for less than two weeks on the weekends (basically shoring up an operating agreement, buying the property, and selecting the management company), and they completely declined my request. It was really absurd in my opinion, so I'm sure this would be a surefire no. However, it may be worth taking the risk for the cash here if it's 2-3x my after tax compensation at my PE firm.
Thanks for all your thoughts in advance, tough situation but I'm a young guy and think what has happened here could be game changing.
TL;DR - what are the risks associated with acting as a sell side advisor on an independent basis while separately working for a small PE firm/ registered investment advisor and can one receive compensation for this?
Almost certain you signed an agreement with your current employer not to do these type of outside business activities. That agreement may have been buried in a "code of conduct", an "employee handbook" or a limited partnership agreement - but i'd be surprised if your employer hadn't close this door.
It is covered in the Compliance Manual. All outside business activities just need approval by the CCO. Our CCO is one of the partners and he manages an entire private wealth advisory business on the side and out of our office.
Quite a few of your questions should be addressed to a lawyer and / or accountant, I am not sure you will get some of those answers here.
But generally speaking, I don't think it would be an issue for you to collect a finders fee from your cousin. You did the introduction and it seems that it's one that benefits all parties. You do need however to be crystal clear and transparent about it so that everyone understand that you are providing advice to your cousin and he will be paying you a fee. And I would 100% clear it up with your current firm. IMO, benefiting from an investment without disclosure would be a firing offense pretty much everywhere.
I'd be extremely weary of doing this behind the ibank's back. The dealmaking world is very small and if they do find out (good chance they do later down the road), your cousin could get sued for violating the terms of the engagement contract.. I've seen a few of these shitty IB contracts lately, especially for cap raising processes - it's not that uncommon.
Is the boutique bank small enough that they wouldn't want to spend a lot in legal fees to fight you? Also get a legal opinion on that engagement letter before you do anything.
A "three guys and a card table" type bank. Super small. The buyer is the one seeking the avoidance of informing any external party, including the bank, about the private placement. I suggested the same on legal opinion on the engagement letter last year, but management didn't follow my advice.
My guess is that if they find out, they will probably pursue legal action since this deal will be impactful to their card table, or perhaps chair, quality.
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