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.
1. Appointing key Financial Advisors
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.
2. the Business Plan
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:
- Company Background.
- Product or Service
- Market and Marketing
- Management Team
- Financial Information
- Risk factors and rewards
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.
3. Defining the funding strategy
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:
- Debt – core and non-core
- Venture Capital Investment
- Private Equity Investment
- Trade Investment
- Partnership or Alliance Investment
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.
4. Seeking the right Investors
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.
5. Presentation Roadshow
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.
6. Heads of Agreement
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:
- The Offer detailing the equity/debt financing that the Investor is offering and return to that Investor be it by way of security, shares…etc.
- The Proposed Finance Structure.
- The Due-diligence required by the Investor.
- The main terms of the proposed Shareholders Agreement or the Lending Agreement.
- Negative pledges – commitments not to perform certain tasks without the consent of the minority shareholder
- Exclusivity for an agreed period.
- Exit mechanism – if the process does not conclude
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:
- Financial due-diligence whereby the Investor will look at the current state of affairs of the company, the past performance of the company and a detailed look at the financial projections of the company including the underlying assumptions.
- Commercial due-diligence with a look at some of the key issues that drive the business from a commercial viewpoint. This will include the markets, the production process if any, the selling and the distribution process, the key suppliers…etc.
- Technical due-diligence – where the product or service is of a high technical nature the Investor may appoint an independent assessment of the product or service.
- Legal due-diligence is to include a full legal review of the title deeds, patents, etc.
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