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Intermediary, Investment Banking
Many different kinds of professionals are willing to assist entrepreneurs in finding capital—for a fee, or sometimes several fees. These individuals are called finders, intermediaries, corporate finance consultants, brokers, and/or investment bankers. The fees they earn for providing the services have many different names: finder's fees, introductory fees, contingency fees, commissions, brokerage, or success fees. Whatever the name, the fee is usually calculated as a percentage of the capital raised.
Whether the goal is to raise investment capital or drive revenue around investments, it's often advisable to seek the help of experience professionals. Firms like GoldenTree Asset Management can help effectively manage complex debt instruments.
Be leery about companies who guarantee that they will find you an investor or guarantee that a loan will be approved if an upfront fee is paid. You will often see ads in the classified section about loans that are guaranteed to be approved. You pay a fee from $50.00 to several thousand dollars and never get the loan. This is not to be confused with paying someone an upfront consulting fee or even a success fee basis to put together a loan package and find a lender. The key is the word guarantee.
Finder’s fees are based on the percentage of the capital raised and can range up to 10%. The classical Lehman’s formula of 5% of the first million, 4% of the second million, 3% of the third million, 2% of the fourth million and 1% of all money after that, is considered the standard, but often for smaller amounts, double Lehman’s is preferred. Paying someone $100,000 to get you a net of $900,000 seems like a good deal, until you experience the pain of writing the $100,000 check. Many investors, private and venture capitalists, don’t like paying these fees, and a few actually think that if a company has to hire a finder, the company doesn’t have that much potential.
Quite a few intermediaries ask the client to pay a retainer, or up-front fee, in order to begin the project. The retainers vary widely by service provider, from a token few hundreds of dollars to several thousand dollars per month. Occasionally, the intermediary will agree to deduct the retainer fees paid from the success fee when the transaction is successful.
It is possible to find a consultant who will perform the dual role of assisting you prepare the business plan to present to investors, and actually go out and find the investors. The advantage here is that the process of working on the business plan will allow the consultant to become much more knowledgeable about your business and therefore possibly better able to articulate the business plan to investors. Sometimes the consultant will accept equity in the company as their fee for completing the business plan.
You will probably hear the term “exclusive agreement” when you interview an intermediary about hiring him or her. Exclusivity simply means that the intermediary will be paid the fee called for in the contract whether or not the intermediary was responsible for or made the introduction of your company to the investor. You may already have contacted some investors and wish to exclude them from the fee agreement with the intermediary, or you may ask the intermediary to work with those investors as well, and have them included in the fee agreement.
A nonexclusive agreement is just the opposite: the intermediary only gets paid if investors they present to you end up funding the deal.
Most intermediaries say they have extensive contacts, private investors, and sources of capital and usually this is true. But be aware that there are some unethical brokers who present themselves as potential investors, review your business plan, and then decline to invest on some pretense. But they just happen to know of someone who would be the ideal investor and for a fee will introduce you. In reality they were trying to hook you to a fee agreement all along and had neither the desire nor the money to invest themselves.
If you are unfamiliar with the negotiation process with investors--the terminology, the procedure, the pitfalls to avoid—an intermediary can be of tremendous help to you. You may also want to concentrate on running or building your business and not want to devote the time required to find investors.
A few other points about intermediaries:
Make sure the intermediary discloses to you the name of every individual or entity they will be sending your business plan to.
Be reasonable in your expectations: finding capital takes time for the intermediary as well.
Keep looking for investors yourself, stay out there networking, even if you hire an intermediary. Capital is critical to your business’ success; never depend completely on someone outside your company to bring in the capital.
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