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BD/IA Risk Review – November 2020

Interview with Dante Fichera, Founder, Independent Investment Bankers Corp.

Financial, Executive and Professional Risks (FINEX)|Investments

By Brian Cavanaugh , Jack Jennings and Jeremy Sokop | October 29, 2020

Risk and insurance considerations and approaches

This month, we’re delighted to be joined by Dante Fichera, the founder and president at Independent Investment Bankers Corp. (IIB). IIB is an Austin-based Broker-Dealer serving a national network of investment banking professionals. IIB offers a full suite of compliance and best-in-class industry services that allows its members to focus on and close more transactions.

Brian: Dante, thanks for joining us. You see a lot across the national stage regarding investment activity and varying deal sizes. HBR put out an article in June stating that 51% of surveyed acquirers anticipate remaining on temporary pause until the timing and recovery are evident through late 2020. Where do you see the opportunity in the current market?

Dante: The year started out normal, but as soon as the pandemic hit, investment banking activity came to a screeching halt for most of our bankers. Open mandates were put on hold and the signing of new mandates slowed down. Sellers seemed unwilling to reset their valuation expectations and wanted to wait for the pandemic crisis to come to an end before re-engaging in their sale processes. That said, private equity has been very active and looking for opportunities, as they hope to capitalize on sellers’ generally depressed earnings.

Since September, things have been loosening up and we have seen a lot of new mandates signed and started seeing closes again. The big difference from prior years has been larger transaction size. When we compared this year with last year, we saw transaction volume go down by about 50%, but our overall revenues remained flat, indicating fewer but larger closes.

Because we have seen a significant increase in new mandates since September, it leads me to believe, based on prior years, that we will see more closes over the next six to 18 months. One can only speculate as to what is driving the recent increased activity. It could be due to bankers’ backlogs, a willingness among sellers to reset their valuation expectations or become more flexible with transaction terms, or the fact that the outlook for the future looks generally positive to both sides of a transaction.

While I’m pleased to see the increase in activity, I must remain cautiously optimistic the uptick will continue given the state of the economy. As we all know, we are primarily a consumer-based economy, and many are suffering or unemployed. It would stand to reason, then, that at some point you could expect the shockwave from decreased consumer spending and corresponding decrease in the multiplier effect to impact many companies’ bottom lines negatively.

My personal long-term view is that we won’t see a full recovery until most Americans feel confident that they won’t be losing their jobs, or if they are unemployed, they will be able to find employment. A vaccine, aggressive government initiatives around public health and further federal stimulus could reduce fear and spur consumer confidence.

Brian: Tell us a little about the fee landscape in the lower middle market segment. What are “norms” this year versus prior years? Do you anticipate these “norms” will continue in 2021?

Dante: Bankers affiliated with our firm have always been competitive on pricing. I don’t see our fees changing unless market forces dictate such a change. Bankers are being more creative in how compensation is structured. This year, I have seen more bankers who are willing to accept a lower-than-market percentage within a certain range of purchase price. I have also noticed that more transactions have had part of the purchase price paid out based on an earnout. Historically, bankers would receive their total compensation based on the negotiated purchase price, but now more bankers are willing to receive the percentage of their commissions that is connected to the earnout when the client is paid. I anticipate that this kind of creativity and tailor-made compensation will continue.

Brian: Turning our focus to the regulatory environment. With the passing of Regulation Best Interest, does the push toward a fiduciary standard for Broker-Dealers continue? What’s your view on the bottom-line impact of the Regulation Best Interest for customers — in your case the customers of your customers (your clients being strictly institutional).

Dante: The fiduciary standard really impacts those Broker-Dealers who are working with retail customers. Since IIB is an institutional shop, our suitability requirements are different because of the level of sophistication of the investors in the transactions that our bankers represent.

I believe that the suitability requirements that retail Broker-Dealers have to comply with now are adequate. Firms are subject to a lot of regulatory and legal risk as it is, and I don’t know that the new standard would help investors any more than the existing rules and laws.

I do find it hypocritical, though, that there are rules and laws to protect the small investor while certain lawmakers are trying pass legislation that will strip investor protections from business owners. The largest retirement asset that a privately held business owner has is their business and they should be provided all the protections under the law afforded to the $5,000 investor who has his money in a stock.

We attempt to protect the business owner by ensuring that if they are working with an investment banker that is affiliated with IIB, that the banker has the education and experience to deliver the services they are promising to deliver. We look for investment bankers with no disciplinary history and a track record of executing transactions. Also, IIB supervises the transaction and performs background checks on the key parties involved to provide another level of comfort and ensure that bad actors are not involved or that criminal money laundering is not taking place. We obtain and review due diligence materials in order to provide transparency for auditors and regulatory examiners. We capture and review electronic communications and provide ongoing education for our investment bankers so they are current on regulatory trends.

I believe that bankers who are engaged in the sale of businesses (which, again, is the largest retirement asset for most of these business owners/clients), should have the proper education, experience and credentials. I also believe they should be supervised.

Because the value of their business is disproportional to their other assets, our clients actually have a fairly high concentration of risk. The structure that our bankers try to assist clients in creating throughout a transaction process — whether it be insurance, compliance, valuation due diligence etc. — is aimed at safeguarding the value of the business asset and monetizing it for clients. The effectiveness of our risk mitigation and compliance controls for the benefit of our clients really differentiates IIB. In bringing bankers onto the IIB platform, we focus on individuals with documentable records of closing transactions for clients, and clearly, we also conduct diligence on our bankers prior to affiliation in order to ensure that the firm maintains an unblemished record of integrity.

In summary, we have recruited an extremely talented and experienced group of professionals to help people execute transactions, and the firm itself maintains ongoing supervision of deals from the time of engagement through transaction closing. But candidly, the real differentiator for many of our bankers is that they can demonstrate to prospective clients the fact that they have demonstrated ROI, often to the extent that our bankers can provide a return on fees paid of greater than 10X through increased sale price. That’s pretty compelling when illustrated to a prospective client.

In the absence of receiving the type of advice provided by an experienced advisor, a first-time business owner trying to sell his business can be at a significant disadvantage relative to either private equity or strategic buyers. Not to mention the fact that our bankers know how to compress transaction timelines, have access to very sophisticated data sets as it relates to both valuation and transaction terms that are market current. In addition, our bankers regularly collaborate, and they are an informal source of insight to each other as it relates to identification of bad actors. As IIB grows, I suspect the value of affiliating will further increase.

Brian: We just talked about some of the differentiators for Independent Investment Bankers Corporation from a seller’s perspective. Talk to us about your recruiting efforts and standards. What are some of the services you offer to your 70+ investment bankers that differentiate IIB?

Dante: IIB is an SEC-registered Broker-Dealer and FINRA/SIPC member that is set up exclusively to support investment banking professionals who are engaged to help lower middle market companies sell their business or obtain debt or equity financing. Our affiliated investment bankers have helped hundreds of companies over the years facilitate billions of dollars in transaction value.

Investment bankers affiliate with IIB for our competitive economics, our experienced service-oriented management, and the value-added services we deliver to aid in our bankers’ success.

IIB has competitive pricing, and our bankers are paid out anywhere between 90% – 98%, based on their cumulative production during a calendar year. We provide the highest payout we can without cutting corners. We invest in people and technology. IIB has robust background research tools, cybersecurity, secured data rooms, email archiving solutions, best practices processes and experienced staff; ensuring that our bankers can focus on deal making and feel comfortable that their back office is working hard and doing the right thing on their behalf.

We pride ourselves on service. Turning requests around and getting back to our bankers in a timely manner with feedback that can help them make good decisions is the excellence we strive for. One such example is the hundreds of engagement letters and go-to-market materials that we review annually. Our bankers need those reviews done quickly so they can keep their deal process moving along efficiently. We turn those documents around for them within minutes or a few hours in most cases.

Over the years, we have reviewed and helped our bankers negotiate at least a thousand engagement letters so each new engagement that we review helps the next banker that much more. The experience we bring to each potential transaction helps our network of investment bankers navigate potholes.

Based on investment bankers’ feedback, we developed some additional offerings that we believe will help our bankers be that much more successful. We host an annual conference that provides not just educational content, but networking opportunities. Two of our largest transactions have been tied to relationships developed during our conference. We distribute a periodic deal sheet for the private equity community. We’ve also negotiated deep discounts on world-class research tools and will create and distribute press releases for closings. These are small but significant services that, over the years, have paid off for many bankers who have chosen to take advantage of them.

As far as good candidates for our platform, we are always looking for experienced investment bankers with the ability to deliver the services that they are communicating to the institutional marketplace. By institutional, we mean they are only sharing investment opportunities with private equity groups, strategics, family offices and the like as opposed to individual investors.

We have helped many investment bankers who have transitioned from a captive environment to set up their own shop. It can be frightening to go out on your own and build your own brand, but we do what we can to make that transition easier. We have many success stories of those starting with IIB and building a successful boutique firm. We have also helped many firms that weren’t happy with their previous affiliation, who wanted to work with us because we understand this space and are not engaged in other activities such as wealth management or trading. We are exclusively focused on the business of supporting boutique investment banking firms.

Brian: Let’s talk for a little bit about corporate insurance for a second. How does Independent Investment Bankers Corp. view insurance as a financial management tool? Could you tell us about your opinion of the buying process?

Dante: Yes, we definitely see value in the insurance product. It’s all about managing risk in a transaction and insurance is a critical piece of that. If someone can see risk and help the parties in the transaction preserve value, he or she provides the client a real service. We’ve seen situations where a deal cannot close without some sort of insurance policy in place. So not only does it have value as a risk transfer tool, but it can often expedite a close.

Brian: We’re seeing a lot of D&O issues come to the forefront with the rise in bankruptcies and firm insolvencies. To that end, PortCo D&O is playing an increasingly important role for private equity fund sponsors almost as a complement to reps and warranties coverage and — to the extent the private equity sponsors are buying — general partner liability.

Dante: Yes, absolutely. That’s a great example of preserving deal value that we talked about. The services that both of our firms provide add tremendous value — and it goes back to the founders transferring their largest retirement asset — to preserving the deal and ensuring the transaction is executed and performs to everyone’s expectations.

Brian: Dante, thank you very much for your time.


Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc. (in the United States) and Willis Canada, Inc.

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