Trust is critical for an investor, says Council Capital Managing General Partner Grant Jackson.
“We expect entrepreneurs to be optimistic about their businesses,” Jackson said at the Nashville Smart Business Dealmakers Conference. “And there's a right way to do it and a wrong way to do it. The right way is telling the truth attractively. You can communicate your enthusiasm. You can share how you feel your company is going to grow, why it's better, et cetera. All of that is fair game. Where things start to cross the line is when we're provided with things that are unrealistic — in which case we may not attribute it to trust, we may attribute it to a lack of competence. Neither of those are good. The other place is, share bad news quickly. Have hard conversations really quickly. And those sorts of things they're going to earn you trust. And you might be surprised how little that impacts valuation or any other issues related to economics. Because as buyers, we bake in a certain amount of bad news. And when we see you come forward with bad news quicker, that gives us confidence that you're sharing the whole story.”
The key is, along the way, communicate as plainly as possible.
“Don't worry as much about presenting your company in absolutely the most favorable light,” he says. “It actually earns you points when you show some vulnerability. It shows that we’re going to have a good working relationship together. You might be surprised how little impact that has on some of the economic terms.”
Sellers, he says, should do their diligence, no matter who the buyer is, do diligence fully on them.
“You learn a lot by doing thorough diligence,” he says. “And all of the comments I just made about the trust that we expect in an entrepreneur, you should be doing exactly the same thing to figure out whether you see that in the buyer. And it's not just the organization, it's the individual people you're going to be working with.”
Another critical aspect of a deal is the leadership in the future.
“The easiest thing for us to invest in as a company, where we're just investing in a team that we have confidence, is the leadership team to get us to the place where we can generate the return that we're underwriting to,” he says.
But that's not always the case with the existing leadership team. So, as it relates to founders and entrepreneurs, he says one of the biggest questions they should ask themselves is if they are the right person in the same role to take the company from where it is all the way to the investor's finish line.
“And don't try and answer that yourself. Find people who have built those aspirational companies, find people who built billion-dollar businesses, get coaches who have mentored CEOs to those levels, and ask them to critically evaluate you and make sure that they're comfortable telling you, ‘No, you're not,’” Jackson says. “If you are, that's great, because that is the easiest thing for us to invest in. But the second easiest thing for us to invest in is a founder who says, ‘I may be the right person, I may not be, or I know I'm not the right person but I think I've got a lot that I can contribute in this way,’ because we can work with that situation to create the right leadership team, which often includes that founder who's been critical to getting the business to where it is. The one situation we can't invest in is where we fundamentally look at it differently. We're not going to pretend and do the deal and then move the CEO out, because that goes badly. So instead, we're just going to not do the deal.”
