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The Advisor as Matchmaker

A decade ago, when Doug Nani was a rookie rep at Legg Mason Wood Walker in Providence, R.I., the firm started a merchant banking division. Little did Nani know that the move would end up providing him with a lucrative way to supplement his earnings. Legg Merchant Banking's goal was to invest in companies with between $10 million and $100 million in revenues, with the intention of eventually selling

A decade ago, when Doug Nani was a rookie rep at Legg Mason Wood Walker in Providence, R.I., the firm started a merchant banking division. Little did Nani know that the move would end up providing him with a lucrative way to supplement his earnings.

Legg Merchant Banking's goal was to invest in companies with between $10 million and $100 million in revenues, with the intention of eventually selling them for a profit. At about the time this division was being launched, an acquaintance of Nani was looking to raise $2 million to buy a printing business. Nani approached Legg about issuing corporate debt for his friend. Though the firm declined to do that, it was willing to raise enough equity to secure the man a minority ownership in the company.

With Nani acting as liaison, the deal went through. The man stayed on with the company and, when Legg sold it, made over $15 million. More importantly, Nani garnered nearly $100,000 in commissions from the deal and also added a new high-net-worth client to his book.

The experience turned into a profitable side business for Nani: matching up small business owners looking to sell their ventures.


Nani emphasizes that matchmaking is not the focus of his practice; such deals are “too few-and-far-between to count on,” he says. In his day job, he specializes in financial and estate planning. Still, matchmaking is quite lucrative, earning him several six-figure finder's fees and more than 15 new multimillion-dollar accounts over the last decade.

“I think this is a terrific business model, and it's probably only used by a few hundred advisors across the country,” says Chip Roame, managing partner of Tiburon Strategic Advisors, a market research, strategic and venture consulting firm in Tiburon, Calif. “It leads to profitable investment banking business and referral fees, high-end private client accounts and great relationships with investment bankers, who are able to refer other clients to the brokers.”

Matchmaking is still something of a rare practice — one that is far more prevalent at brokerage firms like Legg and Piper Jaffray that have mid-market investment banking businesses. At bigger firms like Morgan Stanley or Merrill Lynch, “higher investment banking minimums make it harder for reps to find prospects,” says Roame.

Many brokerages are reluctant to talk about the practice, even though some have recently launched formal programs promoting it. For instance, in May, Smith Barney's wealth management group announced it was joining forces with Citigroup Geneva Capital Strategies to provide merger and acquisition services to privately held, middle-market companies.

“Since a substantial number of Smith Barney's wealth management clients are business owners, we'll now be able to provide them with additional resources when helping them sell their business,” says Deborah Larrison, president and COO of Citigroup Geneva.

Citigroup Geneva provides M&A services to private businesses with annual revenues of between $1 million and $500 million. Its offerings include helping them determine the value of their business, pinpointing the right time to sell and deciding whether all or part of the enterprise should be sold. It also researches potential buyers. Advisors are encouraged to bring in prospects — or existing clients who meet the criteria. If a sale goes through, the advisor is entitled to a 10 percent finder's fee, Larrison says. But, since Citigroup Corporate Investment Banking generally requires a deal to be worth at least $500 million, these transactions haven't occurred in great numbers as yet.

Wachovia has a similar program in its Enterprise Services division. “The aim is to encourage advisors with clients who need corporate and investment banking services to approach our investment banking group,” says Wachovia spokesman Tony Mattera. It, too, has large minimums for the companies it would provide with investment banking services. Below the minimum, Wachovia investment bankers will help find outside deals valued at more than $5 million, but the reps do not receive any compensation for their efforts (beyond the thanks from the wealthy client for whom they arranged the services).


For Tom Roberts, a financial consultant and principal at a Smith Barney advisory group based in Allentown, Pa., Citigroup Geneva's launch in May was a welcome development. Roberts has been helping small business clients create exit strategies for their businesses for two years, and having Citigroup Geneva's resources at his fingertips makes his job much easier, he says.

“We've found that most small business owners are far better at running their business than developing any sort of exit strategy,” he says. “Some go to business brokers and simply find themselves paying $40,000 or $50,000, without a successful sale.”

The typical small business owner does not have the capability to market it to a very broad buyer database, he adds. “Geneva helps me get a business owner the most for his company.”

Legg Mason Merchant Banking spun off into its own company last year — Calvert Street Capital Partners in Baltimore. For Nani, this leaves Legg Mason Investment Banking, which looks for companies valued at a higher minimum of $15 million. (Soon enough, he might be working with Geneva, as Citigroup has acquired Legg's advisory unit.)

“If a good prospect is too small for Legg, there are several investment bankers in the area whom I trust implicitly and can refer him to,” he says.

Roberts adds that acting as a matchmaker is a great way to get a foot in the door with new clients. “We know most of the wealth in this country sits with small business owners,” he says. “So, yes, it can certainly help build up your book.”


One of the best things about acting as a matchmaker now is that it's a seller's market. “I did very little of this from 2000 to 2002, because the market, and tremendous lack of funds, made it so tough,” Nani says. “But, now is a great time. The private equity industry has raised a lot of money, and they're chasing deals. Low interest rates and the limited number of deals out there are driving [business] prices way up.”

Nani says he recently completed a deal through Legg Investment Banking that he thought would bring in $15 million. Instead it went for well above $20 million.

The latest Money Tree survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association (NVCA) confirm that venture capital and private equity firms are once again raising huge funds. “In the second quarter of 2005, the private equity industry continued to witness one of the strongest fundraising periods since 2000,” says Mark Heesen, NVCA's president. Venture capital investing rose 19 percent to $5.8 billion in the second quarter of 2005, and later-stage investing hit a four-year high, the survey reports. Firms involved in the software, biotechnology, semiconductor, telecommunications and medical devices industries are most in demand, the survey found.


Nani says there are several ways to identify good sale prospects. By keeping abreast of recent deals in the newspaper he says he learns what types of companies are currently attractive and commanding big multiples. From there, he may call or write to owners of similar companies to discuss the transaction. “A potential sale may not happen,” he says, “but I'm providing them valuable information. That opens the door for potential clients, because I'm demonstrating my ability to add value.”

In addition, his relationships with Legg and other investment bankers may prompt them to call him with inquiries about a particular type of company they might be looking for. He has also successfully identified prospects among his existing clients. “Surprisingly, small business owners often fail to consider selling their business to help them meet their financial goals,” he says. “In many cases, selling can reduce their financial burdens and even allow them to retire.” There are also methods for selling part of a business, allowing the owner to participate in any future upside, and to remain active in it, if they so choose, he says.

Roberts prospects small businesses via cold calling and networking all the time. “Helping them create an exit strategy to fit their needs is just part of what we offer,” he explains. “But, it's a critical one.”

Many business owners have a preconceived notion of who'll buy their business — typically a competitor down the street, a family member or a higher-up in the company, Roberts says. But, that's not where they're going to get the best deal.

“There are large conglomerates out there — the General Electrics, for example, who make small acquisitions that don't even make their balance sheets, but are strategically wise,” he notes. “There are great opportunities out there that most small business owners probably know nothing about. That's where we come in.”


Nani admits his legal expertise probably helps with the deals, but says it's not a necessity. “I learned things like methods of valuation on my own,” he says. “Any broker can do this if their firm has the adequate resources. It's a lot easier to get involved in this today than when I first started.”

Advisors interested in doing this must educate themselves on the basics of private equity and investment banking both, reps say.

“You need to know what services your firm offers, its minimum requirements for a deal and what types of companies you can benefit with these services,” says Nani. “Read your firm's guidelines on this; speak to people in relevant departments. Read books on the subject; follow deals in newspapers and periodicals…the more exposure you get, the more you'll learn.”

Admittedly, there are drawbacks. For instance, “You can focus a lot of time on these deals and not make any money, which is off-putting to some reps,” Nani concedes. “I'd say, if you have a valid buyer who is interested, you have about a 50-50 chance of success.” One key, he says, is weeding out the bad prospects quickly.

But, even successful deals require time and patience. “You have to explain pros and cons of selling, as you'll find many of these folks never thought of selling before,” Nani says. “If they're still interested, you must be able to explain the entire selling process and answer questions like, ‘What is the business worth?’ and, ‘How do I put it up for sale and keep our identity confidential?’”

He adds, “Just helping someone determine whether or not to sell a business requires a large investment of time.” But done right, it is time well spent.

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