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 $2mmbusiness, 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 theoffice 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 myfrom 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.
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.