Each week, we seek expert advice to help a small or medium-sized business overcome a key issue.
In a country with more than one million small businesses – and where thousands of new ventures launch each year – finding solid companies to acquire and lead to a listing on a stock exchange should be as easy as spotting the tallest person in a crowd.
Except it isn't, says Roger Dent, chief executive officer of Quinsam Capital Corp., a Toronto-based merchant bank.
Last year, Quinsam set up a shell company, called Quinsam Opportunities I Inc., under the TSX Venture Exchange's capital pool company, or CPC, program. The program allows CPCs to issue, list and trade shares on the Venture Exchange as long as they acquire a privately owned company – which becomes public as a result of the transaction – within 24 months.
It took Quinsam almost a year to find a viable acquisition target, Mr. Dent says.
"Some of the best companies these days choose to stay private and get money through venture capital, and some decide it's too much trouble to get into public markets. [There are] too many disclosure requirements and not enough certainty the markets will embrace you," Mr. Dent says. "Also, we're fairly picky and we want to find a good deal that makes money for everybody."
Quinsam's first CPC acquisition should, if all goes well, be finalized later this year just months shy of the Venture Exchange deadline. Once this deal goes through, Mr. Dent and his three partners plan to launch more CPCs.
This means finding other suitable companies to acquire. Mr. Dent says he hopes the search won't be as protracted the second – and third, fourth, fifth and so on – time around. It usually takes from four to six months of due diligence and negotiations to close a deal, so identifying an acquisition target sooner will help ensure Quinsam's future CPCs meet the Venture Exchange's two-year timeline.
So what's the ideal target for Quinsam? As a starting point, the business in question would need to have solid profit and growth potential, a compelling story that will attract today's risk-averse investors, and a strong management team, one that's willing to share information and plans with the public, Mr. Dent says.
"Our first choice would be to find a revenue-producing business where you've got customer validation of your approach, preferably in the technology, consumer products or industrial products space," he says. "We're also open to biotech, but it's not our first choice."
Quinsam's usual sources of leads, which include bankers, lawyers, accountants and brokers, did not yield the expected results when it was looking for its first CPC investment, he says. He knows Quinsam needs to tweak its strategy for finding solid acquisition targets in the future.
The Challenge: How can Quinsam improve its chances of finding the right businesses to acquire and take public?
THE EXPERTS WEIGH IN
Matt Saunders, president of the business accelerator Ryerson Futures Inc., Toronto
Any time you set up an investment or financing vehicle where you have to make an investment against the clock, that's a tough business model, because you may be forced to make a deal that isn't necessarily the best for you. Any business that's getting traction and doing well is going to have a lot of options when it comes to financing. They probably won't want to go to a CPC.
For Quinsam to be successful, they should look for a distressed asset where they can help not only with capital but also with their network and expertise. In my opinion, this is their best likelihood for success: Look for a distressed business that they can turn around.
Manny Bettencourt, chief financial officer for the infrastructure provider Distinct Infrastructure Group Inc., Toronto
Quinsam needs to broaden its outreach. Wealth managers and investment advisers are a great source of information. They know who the up-and-coming entrepreneurs are, and there may also be an opportunity for them to reach out to private equity funds and see if they have any companies in their portfolios that they are getting ready to exit.
I would look at targeting trade groups and trade shows for the sectors that their target companies would be in. Also, focus on identifying lawyers and other professionals who provide services to your target industries but may be outside your network. This might mean reaching out to second- and third-level LinkedIn contacts. Make use of social media and be aggressive.
It might help to build a cheat sheet of the opportunity. If I am a successful business, why should I go public, and why should I go with Quinsam versus someone else? Often times the owners need help to really understand the opportunity. They are very bright, know their businesses, but do not understand capital markets.
Jeffrey Zicherman, CEO of the investment bank Eventus Capital Corp., Toronto
I would recommend Quinsam Capital take a patient approach in selecting its qualifying transaction and ensure it meets all the criteria they are seeking. Quinsam should continue to tap into its current network of bankers, lawyers, accountants and brokers. In addition to this, it would be a good idea to attend investor conferences in its sectors of interest. Networking on social media platforms such as LinkedIn could be another effective way to find that opportunity.
Once Quinsam finds an acquisition, it shouldn't be a problem to finance it and advance things, as we are seeing significant institutional interest in the space so far in 2016.
THREE THINGS THE COMPANY COULD DO NOW
Consider a fixer-upper
Quinsam should consider deviating from its current criteria and set its sights on a distressed business.
Cast a wider net
Mr. Dent and his partners should broaden their network to include professionals such as wealth managers and investment advisers.
Showcase the opportunity
Not all entrepreneurs understand capital markets. It's a good idea for Quinsam to create a cheat sheet highlighting the business opportunities it offers.
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Interviews have been edited and condensed.