Frank Coombes and Coombes Corporate Finance have led a number of fund raising assignments. These assignments include the following:
The process of raising finance is expensive, time consuming and demanding on the company’s resources. Therefore when completed, there is a sense of jubilation as well as relief. However, reality is that once funding is agreed, the ‘real’ challenge begins, the challenge of delivering on the investment potential. So what can the company do to enhance its chances to reach its potential?
One of key tools that should be put in place is a Performance Measurement and Reward system. Such a tool will monitor the progress of the company against its objectives and peers, and motivate staff to collectively deliver the vision, strategy and objectives of the company. The key building blocks are:
An accepted phenomenon is that ‘what gets measured gets managed’ as its focuses the participant’s minds on that being measured. Traditional accounting measures, in the form of management accounts, are very limited in providing a complete measurement tool as:
A more useful measurement tool is Kaplan and Norton’s ‘Balanced Scorecard’ which compliments ‘financial measures with operational measures on customer satisfaction, internal processes, and the organisation’s innovation and improvement activities that are the drivers of future financial performance’. The tool has four dimensions namely, Financial, Customer, Internal business and Innovation & Learning perspectives. The Balanced Scorecard not only measures past performance, but also puts on measures that monitor aspects that will effect future return to the company.
The Financial Perspective should include the traditional measure of comparing actual results to budgeted and/or forecast. The company should also focus on the ‘key financial drivers’, drivers that will deliver the preferred financial results of the future. These might, for example, in a technology company include analysis on sale leads and orders, analysis of product mix and their contribution to the company’s bottom line or labour cost as a percentage of sales revenue.
The Customer Perspective needs to focus on the needs of the company’s customers. Measures should be put in place to evaluate customer satisfaction with the company’s products and pre and post sales service. This might include delivery lead times, number of defect products, how long it takes customer service to respond to a customer inquiry or the volume of repeat business, which is the ultimate measure to customer satisfaction. A word of caution, make sure that the item that you are measuring is important to the customer, for example there is no point in measuring if customer service answers the phone within 10 seconds if the customer is not concerned about this.
The Internal Business perspective should focus on the internal items that the company needs to excel at in order to succeed. For example, in a technology company a key item is its ability to recruit and retain software developers, hence a measure may be staff retention measures. Other measures would include production efficiency and production quality measures.
The Innovation and Learning perspective focuses on items that will ensure the company can continue to improve and create value. This would include measures on employee competency, training provided for employees and process change and improvements.
Once the company has established what should be measured, it then needs to establish
The measure owner is the individual or group of individuals who have the greatest influence on that being measured. It is important when setting measures and the targets in particular, the measure owner is involved and ‘buys into’ both the method of measuring and the target being set.
The target needs to be stretching of the owner’s ability but yet achievable and fair. This will ensure that the owner is motivated and focused on the key drivers for the company. It is also important to include some form of benchmarking, comparing performance with both internal peers and external competitors. The external benchmarking will ensure that the company keeps a focus on the market environment outside the company.
The targets set need to be reviewed on a regular basis to ensure that they remain realistic and equitable while bringing the best out of the owner of the measure. Targets would need to be changed if they were not correctly set initially or if there is dramatic change in the environment that the company operates.
The reward system is used to guide individuals to deliver the standards set out above. The system should be clear, motivate the individuals who are included and the outcome needs to be in the control of the person being held responsible.
The reward system needs to be clearly linked to the measures and targets set out by the company. These links should be clearly understood by all employees. The individuals should know what the company is trying to achieve, what is expected from them and how they contribute to the overall success of the company.
The reward system is intended to be motivating, hence the rewards should encourage the right behavior. They should rewards that the employee is willing to change his behavior to achieve, i.e. be worth the effort.
The objective of the setting up a Performance Measurement and Reward system is to motivate individuals to deliver on the potential of the company. Therefore the company needs to clearly define its vision, the strategy it has to achieve this vision and the stepping stone objectives in delivering the strategy. The Measurement & Reward system should than be tightly linked to these objectives.
Apart from being a motivation tool, the benefits of a Performance Measurement & Reward system are:
Once put in place, the system can be the difference between the vision becoming reality or just remaining a vision.
This is the Second of a series of 6 articles aimed at Owner Managed Businesses addressing various issues that they face through the complete business cycle from Start-Up, through expansion to final exit. By Frank Coombes, Coombes Corporate Finance
Owner Managed and Privately owned in Ireland are certainly in expansion mode. A recent survey in this sector showed that almost 30% of the sector expects to see some M&A activity within the next three years. The sector is seen as buyer as opposed to sellers. Discussions with financial institutions support this expansion mode as they see strong growth in the Owner Managed Sector. This expansion required capital investment. This article sets out the key steps in a fundraising process. It can relate to raising debt, equity or the various financial instruments in between and it can relate to fundraising for startup, expansion, project finance or acquisitions.
The fundraising process behind these transactions involves a number of stages, during the course of which a company appoints advisors, prepares a Business Plan, defines their funding strategy, presents to potential investors, undergoes a due diligence investigation and finalises the detailed legal agreements before finally receiving the investment funds.
For many Owner Managed Businesses seeking finance, they have a small core management team, a team that should be fully focused on delivering the objectives and goals of the company. The common error made is that during the funding process, management’s focus is distracted away from the development and operation of the company’s core business. On appointing Financial Advisors, the company can ensure that this distraction is minimised and the necessary skills to assist the fund raising process will be sourced.
The Financial Advisors should advise, manage, and work closely with management in executing the financing process. The Advisors will also have access to a network of contacts including financial institutions, private equity Investors, Venture Capitalists, and debt financing investors. It is this network of contacts that will greatly increase the company’s ability to raise the appropriate funding mix at the best value for the Owner Manager or existing shareholders.
Irrespective of whether you are raising debt or equity, it is important that the company prepares an informative, clear and concise Business Plan. Normally this plan is the investor’s first view of the company and in this situation, first impressions are vital. The Plan should include a short executive summary and sections on:
Any potential investor will focus on the experience and expertise of the management and the exclusivity and growth potential of the company’s market. These two sections should highlight the company’s unique selling points.
Once the Business Plan is completed and the amount of funding is established, the company should identify with its Advisors the key sources for its finance. The sources could include one or more of the following:
It is important to note that no one source of finance may be ideal to satisfy the full financing requirement, hence it is important to break down the funding requirement into various components. Each component may be financed from a different source. Once identified, the fund raising strategy should then be established with key steps and milestones in managing the process. Such a strategy should form the project plan in completing the financing process.
The Advisors, in association with the company, should then identify the potential investors, be they debt or equity investors. Initially a business summary is sent to potential investors and if they are interested the full Business Plan is forwarded for their consideration. If interested, they will then proceed to meeting the company.
This key part of the process will require significant time input from the core management team, as the investor wants to obtain a view of the team’s capability and experience. The presentation should be based on the business plan and delivered by members of the management team. It should highlight the core drivers and unique selling points of the company. It is also important, that the company and its advisors evaluate the potential Investor, as many investors will be actively involved with the company during the investment period.
Based on the business plan and presentations, the company should endeavor to receive offers of funding from more than one potential investor. This gives the company greater strength and flexibility for negotiation. Prior to selecting one offer over another, the company should evaluate the financial and non-financial issues of each offer of finance. It may often be the case that the long-term benefit that can be gained from the expertise of the investor may out weigh some short-term financial benefits. Where possible, all of the contentious terms of the potential agreement should be agreed prior to signing the Heads of Agreement. The heads of agreement will include:
For Equity investments the valuation of the company will be a key negotiating factor. The final valuation will usually come from detailed negotiations between the company, the Advisors, and the Investor but in the end it must be one that all parties are comfortable with.
On agreeing the Heads of Agreement, the due-diligence process begins. This will be on behalf of the investor and normally include:
This process can be the most time consuming part of the financing process taking 4 to 6 weeks for equity investors, but shorter for debt investors, and it is important that this process is managed correctly to ensure that no undue delays occur.
Once the Investor is satisfied with its due-diligence, they will then proceed with the company to drawing up final agreements. When these are completed and signed off by both parties, final approval is received and the investment can be exercised.
It is important to note the typical length of time that it takes to complete the financing process, particularly for equity investment. From the time that an interested Investor has been identified, it should typically take 12 weeks to complete the process. It is important to note this length of time when drawing up any financing strategy.
Once the financing has been received, all that remains is that the company and its management team deliver its objectives and maximise the full potential of the company!
Frank Coombes – Coombes Corporate Finance 021 4943944