James ‘Jim’ Simpson is a financial advisor with Finance 500, Inc. with over 17 years of experience in private equity, investment banking, and legal and senior corporate management with entrepreneurial-stage companies. He served as the CEO of a start-up technology company – and was the advisor, investment banker, outsider investor, and director to over 25 entrepreneurial companies where he invested or raised over $500 million. In addition, Mr. Simpson, was the Brown Simpson Asset Management, LLC founding member. It is a private equity investment organization that focuses on domestic entrepreneurial-stage companies. It is based in New York.
Paola Trentadue: If you could give some brief overview of you and your firm?
Jim Simpson: Absolutely. Finance 500 is based off of urban California. At this point, we have about 25 investment bankers that are part of the group. We are focused on the lower minimal market space. We define that as companies that have anywhere from $500,000 to about $7 million in 12 months. The group is comprised of specialists in a number of different industries and we’re built on the notion of collaboration. So, most of our bankers work and team up on each transaction that they work on and bring both the relationship management, as well as the industry specialization.
The firm’s been around since 1982. They have eight offices and 110 people in the firm. My mandate as the head of investment banking is to grow it to a full national practice and probably something on the 76 investment banker range, and have coverage in across the the United States and have full industry coverage – deep vertical expertise both within industries and product coverage.
Paola Trentadue: Great. Can you tell us about the specific industries that you work with?
Jim Simpson: Right now, I would say we have a number of different specialists. We have everything from water, environmental services, semi-conductor, consumer products, manufacturing, community banks, aerospace, airlines, med tech, to bio tech. We have specialist in every single one insurance.
The key with us is that we are really built by operators. So, most of the investment bankers have not been necessarily investment bankers in their entire career. A lot of them have had deep operating experience.
I’ll give you an example. Our water specialist had 25 years of operating experience in the water industry as a chemical engineer. He had a key responsibility of a $100 million international segment of U.S. filter – most recently around the business development group Hentero, which is a multi dollar water company.
So, that gives you an example of type of deep industry expertise that we bring into trying to continue to grow in the group. We also have a five or six c group that’s coming on. It will be part of our broker dealer. We’re all very excited about that, as well – so, we can start to access this new form of capital formation that is coming to the market.
Paola Trentadue: I’d like to talk to you about a recently closed transactions.
Jim Simpson: I can’t disclose names. I will give you a transaction that I’m familiar with because I want to participate as much more. It was a water company – a water treating company based in California. Probably in $3.5 million turn in 12 months – for very profitable companies probably 12 or 13 months top on.
The owner wanted to take a few dollars off the table; take care of their family; and make sure that they didn’t have all their eggs in one basket. The owner also wanted to grow the company over the next five years to exit at a much higher valuation than they are in more of that particular time.
So, we were able to identify that perfect institutional investor that came who had deep industry experience. This particular investor brought this petroleum engineer, who understood exactly what the business model and agreed with a great deal of appreciation of itself.
At a cultural level, it was a perfect fit for what they wanted to do. Our client was able to take off a sizeable amount of buying in to protect the family completely outside of the business. The company is doing extraordinarily well.
So, all farmers are very happy with what’s going on there. That was, in that case, is a majority of the capitalization. They came away with growth capital, so it’s in true recap. But most of the proceeds were out, and the company want it to continually have a good look on the back side of the transaction.
Paola Trentadue: Can you tell us about some of the other parties that were involved in the transactions and what their roles were?
Jim Simpson: In the normal transaction of this type, where you’re going to have the parties that sat with it – of course, you got a person at the issuer. And then you’re going to have the parties that are going to represent the investing parties.
On our side, of course, we have the accounting group and we would have even the senior bankers. When I say senior, I mean they’re banking the traditional bank. These are the folks that were in company prior to us – that was kind of core team on the issuer side.
On the investor side, this group brought in a third party transactions services group into quality earnings analysis that brought them into separate insurance – a kind of risk management group to evaluate their entire risk management. This company had some environmental services types of issues so we link those aspects to that.
We have an environmental services group to assess some quality of certain controls and procedures and quality assets that they were running because this is a heavy asset business. So, there were a number of different parts that we haven’t orchestrated and kind of quarterbacked through the entire thing. That kind of was making sense, right?
Paola Trentadue: Sure. How do you choose the people you bring in to work on a transaction?
Jim Simpson: You have that great deal of trust and how the parties will handle themselves within the transaction; how they will complete their job, and do it without creating collateral challenges. So, we really need to understand the person, and people that are able to do that.
There are some great transactions services groups that really understand that – not only do they have to do the quantitative type of work, but they also have to assess the qualitative. They have to do it in a way that is additive from a cultural standpoint and consistent with the prime equity group – that is a contemplating company into the transaction.
So, you quickly know what good people and some of the people who can kind of get in the way of this types of delicate discussions and delicate examinations of the business.
The interesting thing that we’ve go to deal with was that it really wasn’t the investor or an owner. There were some challenging issues around the dedication. It has have to do with some property, and some environmental concerns around the company. It’s always water treatment and plants, so you have obvious concerns. What turned out to be one of the bigger challenges we had to get creative on was that because the, it is a majority recap that the owner who had or the senior line that was already in the company had a personal guarantee with the owner. That’s very normal customers from a very small companies.
But now that it contemplated with the investors were gonna own a significant portion of this company, it no longer makes sense or is appropriate to have a personal guarantee with the senior liner. The owner shouldn’t take that type of risk because for obvious reasons. So, having to deal with that and having to ultimately replace the senior line became an additional wrinkle in the transaction that actually is more challenging that we expect it. We ultimately resolved it, but it had at another level of complexity that we did not anticipate out of the game.
Paola Trentadue: Are there any interesting takeaways or any lessons or one from this deal?
Jim Simpson: As an investment banker, what I learned from this deal was – again, this is kind of commonsensical – it was much better to have a more negotiated LOI around the game and hit deals with every aspect of the SPA and it doesn’t leave as much for discussion later on…allows you to avoid as much as possible returning on the transaction and, the QLEs are gonna probably result in some challenges on that front.
But you’re not going to have legal issues that are gonna challenge you on that front so, we went from kind of your normal customer LOI and out to a 17-page LOI- and we really dealt with the issues right upfront in the center and we didn’t want to have any uncertainties or to mitigate for these uncertainties as we got closer to the transaction.