In his first article, Les Green – private equity adviser to Merchant Securities – discussed private equity preparation; dealing with some of the fundamentals that could help your business stand out from the crowd. Here, he turns to the next stage – execution of the deal. This covers the process from the initial meeting with potential investor(s) until, hopefully, real cash changes hands.
1. The first meetingBy achieving a first meeting with a potential investor, a company increases its chances of successfully gaining investment by around ten times. To use the opportunity wisely there are some pretty obvious rules to remember – so obvious they are regularly forgotten.
First, be sure to arrive early. A team that cannot get to a venue on time leaves a negative impression in the mind of any prospective investor. Check any equipment you need to demonstrate. While it might have worked before you left your office, there is no guarantee it will still work at the venue. Second, bring some extra copies of your presentation materials, in case there are are more attendees than you expected, and do not rely on the investor to print off any files that you forward to them by email. And rememeber to do some homework on the investors – this will maximise the time you spend with prospects in useful dialogue rather than being told things you could have found out with advance research.
Moving to the less obvious, it’s probably best to keep the number of team attendees to a maximum of three, ideally representing sales, finance and operations. A short, punchy presentation of around 20 minutes in line with the key messages highlighted in the executive summary will provide potential investors with a chance to make sure they understand what the business does now and where you wish to take it with their support.
If you give investors the chance to ask questions as you present, try to avoid being sidetracked too far from the main script and be prepared to say that you will address a particular question later on rather than deal with it immediately. If you cannot answer a question straightaway, best not to wing it!
The first meeting should be an opportunity for both sides to exchange information about their understanding and expectations. In terms of the investor, the most common topics are likely to be:1. A clear and concise description of the proposition and what makes it unique.2. Who are the intended customers and how will they be reached?3. When is the company going to be profitable?4. How much investment is required and when? What will the funds be used for?5. When can investors expect to get a return and how much is this likely to be?
The kinds of questions you should be asking include:
1. What is their usual investment range?2. What is the ideal stage of company development (e.g. start-up, pre-IPO)?3. What type of investor are they (passive or active – the latter may be an issue as they may wish to take a non-executive role)?4. Are there any conflicts of interest that would make this investment impossible?5. Finally, like all good organisers, sum up the main action points from the meeting and agree the timescales for follow-up.
2. The investment processBeware: the funding process almost always take longer than imagined at the outset. Experience suggests that most private equity investors anticipate their process will take around three months. However, in reality, seemingly trivial matters can become major stumbling blocks and so assume it could take up to six months.
Throughout the investment process, the management team must remain commercially active and keep the company solvent. Too often, managers are either deflected away from their most important task – delivering the present business plan for existing shareholders – or allow the business to become short of cash because the process has taken longer than expected.
Neither of these will improve the chances of raising new investment.
The private equity investor will use the fund raising process as a guide to how the company is likely to handle matters during a complex commercial negotiation – say with a large prospective customer. Unfortunately this means that while day-to-day activities must go on, another set of critical activities will be running in parallel: a test for any management team but particularly difficult for the “first-timer”. This is one reason why seeking professional assistance is important.
3. Due diligence Potential investors will need to understand a great deal about: the management team, major shareholders, the business structure and financial records, present customers and what assets (and liabilities) belong to the company.
It is worthwhile preparing as much of this information as possible, in advance of discussions with potential investors, as this process often raises issues of itself, e.g. documents cannot be found, legal contracts have not been renewed (or signed), ownership of assets (such as intellectual property) cannot be proven.
The management team must honestly to declare their own personal background and highlight any possible difficulties from the past, e.g. bad leaver employment terminations, outstanding county court judgements. It’s worth remembering that being as transparent as possible with those involved in a transaction is critical in building trust.
4. ClosureAfter what is likely to be several months of discussion, endless exchanges of information and numerous meetings between would-be investors and the company, the time will hopefully arrive for investors to make a firm offer to complete.
It is not unusual for final investment offers to have a sting in the tail. The negotiations with a prospective investor are, therefore, no different than with a new large customer who pushes continuously trying to ensure they get the best possible terms until the company makes it clear there is no more to give. The golden rule is: be prepared to walk away.
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