Business at the Speed of Trust & Simplicity

I came across two stories attributed to Ernest Freedberg, founder of the London-based merchant-banking firm Freedberg & Company, that resonate well with those of us in the SMB space. They’re stories of trust and simplicity.

Trust

At one point in the firm’s history, Freedberg brought in two brothers to run things on a day to day basis. The brothers came across a deal from a guy everyone in the City was queuing up to invest in. They were all convinced this was the greatest deal since sliced bread. For whatever reason, Freedberg decided to sit in on the pitch. After the presentation, Freedberg told the brothers the firm wouldn’t be investing a single penny in the deal. Freedberg said the guy was a liar and a fraud. The brothers, perplexed, explained the guy had been vetted extensively and all the most important players in the City were investing in the deal. Freedberg told them the guy came in with answers to every single question he asked — noting an honest man wouldn’t be able to do that. Some questions should have had an “I don’t know, I’ll get back to you” answer.

At the lower end of the middle market, say $500k to $1m EBITDA/SDE, trust is more important than any amount of diligence or any number of expensive quality of earnings reports you can do. I’m not saying you shouldn’t do diligence, but it’s not called the messy middle for nothing. Just be wary of any seller in this space who has ‘all the answers’.