“The turndown is about networking for your next deal.”
That piece of wisdom was shared more than once over the years by a founding partner of my former firm. That firm is now on Fund 8 and has $2B+ under management.
His primary point was to recognize how every interaction with referral sources, even a turndown, was a customer service opportunity.
When you think about it, there are few actions we private equity professionals do more often throughout the year than turning down a deal! If your firm sees 300 deals per year to close 1 deal, for example, then 299 were turndowns! Even if you tried to pursue many of those deals, your valuation being too low or pricing being too high was the reason you lost them (an implied turndown).
Further, consider how much time and energy we in the lower middle market spend on trying to source deals...conferences, coffee meetings, cold calling or emailing companies, golf outings, email blasts, blog writing (!), traveling to every corner of the U.S., sponsoring events, tracking notes in our CRM, hiring business development people, management meetings, and more. These are all the actions to get the 300 deals to close the 1.
The higher quality an interaction, you compound your origination efforts further and can push your sourcing stats to 350, 400, or more.
For those who don't show enough respect to the referral source, the deal stats go the other direction. Maybe not overnight, but a reputation is formed and the inbox gets more quiet.
Thus, here are the five best ways to handle your next turndown:
- Respond in a timely manner when possible. For most people, a quick no is much better than prolonged maybe. They will respect you more for it, because now they can call someone else and improve their chances of getting their deal done.
- Provide thoughtful and constructive feedback, without being insulting. Sometimes that is sharing a war story. Sometimes it is simply reminding them of your investment parameters. Whatever you decide, limit your reasons to no more than two (even if a longer list actually exists). They took a risk by showing this to you, after all, so don't make them feel dumb.
- Humility. "It's not you, it's me." "I don't have enough expertise in this sector." "Valuation is going to be too rich for me." "Our limited partners want us focused over here instead." You get the idea. It takes the sting out of the turndown, and less personal.
- Match your communication to how well you know the referrer. Consider the phone vs email response. Would just sending an email feel too impersonal? Would asking an associate to call and turn down a deal sent by a partner to a partner make it seem beneath one's paygrade? One is more expedient, the other gives you a chance to get better acquainted.
- Add value and build relationship. Offer referrals for other firms they should consider, including firms that might be off the radar. Ask them thoughtful questions about the deal they showed you, or industry that it's in, to help that party think more critically and become more astute. Ask if they are going to next ACG event, what else are they working on, get their take on a macroeconomic topic, how is fundraising going, etc. Even brief but positive interactions have cumulative benefit over time.
In contrast, here are the five ways to ensure you'll see fewer deals from that referral source going forward:
- Ghosting. There's no better way to say you don't care then not responding to calls or emails with deals.
- Being too cocky. Acting like you did them a favor by reviewing their deal (instead of recognizing they are the referral source)
- Too many turndown reasons. The more you pile on, the more insulting your message becomes!
- Flippant or 1-word responses. Pass, too small, not a fit. Those are common responses. The translation is that you can't be bothered to given any more thought, and/or that seeing their deal was a waste of your time.
- Asking an associate or admin to deliver the message. Once again, sends a signal that it wasn't worth your time.
Of course, PE professionals are busy, travel, and messages get buried. Even the best turndowners occasionally fall short of the best practices! The point is to make the actions from the bottom five the exception, not the rule. The best origination professionals always strive to deliver top customer service.
So the next time you're about to fire someone off an email, use those same 5 minutes and just give them a call. Show humility, give thoughtful feedback, and then spent 4 minutes shooting the breeze.