If it costs you more to do the work then you are (a) guaranteed payment for or (b) hypothetically could be paid contingent on what client may or may not do… then why bother?
There are 4 factors that debunk the myth so many BORROWERS seeking capital have that erroneously assume compensation for all tasks “tangentially-related” to attracting (and being approved) for capital are based only on transactional fees, or commissions or “success fees” These are;
(1) Wall Street SOP
(2) Government regulations
(4) Failure to meet approval criteria
Wall Street fees are diversified and have been for over 100 years. Here is a list that debunks the prevalent myth that suggests they are not;
SEC regulations prohibit stand alone commissions in most cases. Here are details with legal renderings at the bottom;
The dictionary specifically describes commissions as a “percentage of a quantifiable sum”. Yet the wide range of services an IR firm offers are of intrinsic value and “tangentially-related” to attracting capital. The opposite of quantifiable.
A few such IR services include telemarketing and government relations. Some people recognize that implementing an EB-5 foreign investors campaign requires both of these things. Then there is analysis and commercialization of technology. All the above require strategy advisory support. Financial Planning Magazine debunks the myth that consulting services are a commission task;
Then there is that unspoken issue about the deceptive nature of “success fees” that are contingent entirely on client actually meeting funding approval criteria. Let’s admit that most callers cannot even specify what type of capital they are seeking. So how does one prove eligibility for a type of capital they don’t know? This explains why 95% of all deal-flow in the US is rejected for 4 reasons; including incoherent, conceptual, deceptive, or just plain NO skin in game. http://SinCityFinancier.wordpress.com/2013/02/19/what-good-is-a-success-fee-if-borrowers-fail/
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So for the sake of discussion, let’s PRETEND none of the above issues matter and let focus on the one unescapable issue. COST. If it costs more to do business then potential income; then why bother?
Over the years, I have lost count of how many dreamers who call and say “We’d like you to pay operational costs to represent us and we verbally promise to pay your company a decimal point of a fraction of 1 % in the event we meet approval some unknown month from now”. Really? Mind-boggling.
In the real world, an Investor Relations media communications firm that includes an IR Call & Data Center is staffed by more then 1 person. More like 40+ people. So for the sake of discussion lets say all fees are “success-fees” of 10% per small transactions of $250K. This is $25K. Which is equal to the monthly cost of building and A/V equipment only for an IR firm that has only 1 location.
The above cost does not include any labor cost. Assuming half a staff of 20 part-time people that is another $20K per week.
Let’s not forget the additional third cost called 35% federal income tax, as well as, county and state business tax.
Four factors can contribute to making at least a 25% profit margin over a total annual break-even cost exceeding $1.5M. These are expansion, cost-containment, shorten timeframe to close, and increasing transactional volume. One way to accomplish the latter 2 is to require the majority of client requests henceforth to be ABL monetization of P/O’s, A/R’s, BG’s, SBLC’s etc. Preferably transactions over $100M per month.
* If you have an IR deadline and wish to be a client proceed to the CONTACT page at the top of this blogfeed.