Capital Marketers

Risks And Rewards

But just as a bad insurance agent will get you bad insurance, a bad financing consultant will likely get you undesirable financing. So here's what to look for when choosing a consultant.

First, says Suskind, avoid people who don't charge fees. (Hmmm, was he paid to say that?) Well, yes. But, he says, "while this flies in the face of conventional wisdom, a finder [someone who offers to find an investor for you without earning a fee] has no vested interest in your company. They will simply circulate the deal as is and many times hurt a company's chances by overshopping it."

Fees, says Suskind, not only help the consultant defray expenses but also give the consultant the commitment from the company's senior management that is essential to get the deal done.

In the same breath, however, Suskind says fees for structuring and finding financing should be small and represent only a tiny fraction of what the consultant could earn if he or she is successful at closing the deal. And finally, he says, it is frequently in the best interest of the company raising money--as well as the deal itself--to structure the back-end compensation as equity participation because fees paid at closing may inhibit the consummation of the deal. Private investors often want their entire investment to go to the business rather than having a chunk given to a financing consultant, while underwriters of a public offering feel that any fees given to a middleman are taking away from their compensation.

Next, says Suskind, check the consultant's references. "It's amazing how many entrepreneurs will hire someone to help them raise money without ever checking to see that they have successfully done it before," he says. Suskind recommends speaking with the principals of three companies for which the firm has arranged financing. "Not only do you want to find out if they succeeded, but you also want to make sure they performed professionally during the process."

Finally, says Suskind, if you are going to hire someone to help you raise money, make sure there is an "out" clause allowing you to escape unscathed within a reasonable time period. "You should be talking to sources of capital within 60 days," he says. "If you aren't, something is wrong, and your deal is probably floundering--which, as I learned, can be fatal."

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This article was originally published in the October 1996 print edition of Entrepreneur with the headline: Capital Marketers.

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