An Investor’s Warning Regarding “Do-It-All” Advisors6 minute read

There are thousands of small-cap companies, and perhaps an equal number of would be “advisors” that vie for business from officers and directors who are eager to transform the profiles of their companies – sooner versus later.

These advisors come in all shapes and sizes.  Some promise to help increase your company’s trading volume or stock price, others provide leadership and business development counsel, and there are many who represent themselves as capital raising experts.  And, predictably, there are advisors who claim they can do all of these things, and more.

Here’s the problem: a small percentage of these advisors are terrific, most of them are not great, and some of them are downright dangerous.

I have spent over ten years investing in small-cap companies.  During that time, I’ve gotten to know and interact with countless management teams.  Despite their sophistication and successful backgrounds, CEOs too often fall victims to advisors who promise to deliver fast, impactful change.  But the old adage “patience is a virtue” is especially true in the small-cap world, where there are definitely no end runs to success.  When small-cap CEOs attempt shortcuts – often at the behest of inexperienced or ill-intentioned advisors – the results can be swift and unforgiving.

Every action and inaction are parsed when you run a public company.  Your reputation is truly on the line. Though companies can certainly re-invent themselves, investors do not forget – or forgive – major missteps.  If you violate investor trust… you most likely will never get it back.

So, what can you do to avoid working with advisors who can irreparably harm the company’s credibility with investors?  Consider these seven steps.

1. Talk to investors. Before hiring any third-party advisors, inquire about their reputation with other public company officers and directors, and with investors (whether or not they were provided to you as “references”). With respect to investors, you can typically get the most helpful feedback from those who have done the most fundamental due diligence on your company.  They are most likely to be long-term investors, and are incentivized to help you avoid missteps.  More opportunistic or momentum investors might be biased in favor of short-term stock movements, and are more likely to provide feedback that’s conducive to that result.

2. Track record. The advisor should have a demonstrable track record of success. This may seem obvious, but it is less common than you may think among the multitudes of third-party advisors out there.

3. Firm size. Size does not always matter. If you vet the individual or firm properly, you may be surprised that smaller can be better in many cases. Some of the best service providers I have come across in the past few years work at smaller firms with fewer clients, spending more time on each.

4. Do-it-all? Most advisors and firms are not the all-in-one shops that their marketing depicts. Start by having a conversation with the advisor, and just ask them point blank: “Of all the services you and your firm offer, what do you think you’re best at?” Listen carefully to the answer, and then try and verify it through your diligence conversations with other management teams, and investors.  Though it perhaps goes without saying, you only want to hire advisors to assist with what they are most expert in.

Be particularly careful when advisors represent that they help companies raise capital – or make capital introductions – for a fee. With very few exceptions, that your company’s attorneys can expound upon, individuals who are paid a fee for placing, valuing or selling securities, need to be licensed.  The key red flag is when unlicensed advisors tell you that your company is really just paying them for consulting services in conjunction with a capital raise, not really for banking work.  Chances are, most state and federal regulators might not see it that way.  And if their name ends up in the “paper,” the name of your company might be right alongside them… or worse.
5. Internet search. In addition to checking to make sure their professional backgrounds are consistently represented in bios that might exist on LinkedIn, company websites, nonprofit boards, etc., you should put an advisor’s company name and individual name through Google searches using keywords like “defendant,” “respondent,” “SEC,” “NASD,” “banned,” “sanctioned,” or “fined.”  While it would be nice if it weren’t the case, small-cap advisors aren’t always forthcoming about trouble they’ve been in.

6. Contract duration and scope. All third-party advisors should have to earn your business on an ongoing basis.  Consequently, you should be extremely cautious about advisors that propose contracts with minimum durations of six months, a year, or longer.  When in doubt, month-to-month should be the preferred term.  Also, engagement agreements with advisors should never be vague. Try and be as specific as possible about what you are purchasing, and, where possible, attach performance metrics to the services; e.g., “The goal of Advisor’s search engine optimization work regarding [Company’s] website is to increase the unique visitors to [Company’s] site by [XX%] over [YY] time period.”

7. Press releases. Before agreeing to allow an advisor to issue a press release announcing their retention, more CEOs should ask themselves the following question: “I certainly understand why it might benefit the advisor to announce a new piece of business, but how is the press release going to benefit our shareholders?”  If the answer is unclear or negative, then don’t agree to the press release.  If the advisor is fixated on the press release, you probably have the wrong advisor.

Investors like to say that it’s always better to not invest than it is to invest and lose money.  Similarly, if you have any doubts whatsoever about the advisor you’re considering, don’t retain them.  And no matter what, always remember that there are no such things as shortcuts – or quick fixes – for public companies, and anyone who is peddling them should be ignored.