· Author: Acumen · 7 min read
Are you going for a fundraise or do you want to sell/merge to/with another company? Why do you want to raise funds? Is your company in a distressed situation or do you just want to expand for synergy benefits? The answer to these questions will define the approach you adopt for raising funds or selling your business. It is necessary for you to understand the purpose behind you raising funds or selling your business. Some of the purposes can be as follows:
- You have great business opportunities to expand your business but the banks are reluctant to fund your business.
- You are running your business for a long time now and want to encash a portion of your business for contingencies.
- You have brought your business to a level from which you’ll need the help of strategic players to expand.
- You don’t have anyone else to take over your business and thus you want to sell it.
- You want to tie-up with a global player or a joint venture to tap future growth potential.
- You are willing to do backward and forward integration in related business.
The process of raising funds and sell-side can be a tedious and long process (8 to 9 months) where a businessman requires professional help. This long process can be divided into several stages (9 stages). These stages are explained briefly in the following paragraphs to give you an idea of how we can help businesses in this process.
Let us understand the difference between the terms fundraising and sell-side to get acquainted with the process followed:
Fundraising: Typically, fund infusion as growth capital from private equity/ venture capitalists
Sell-side: Primarily sale of shares of promoters and/or existing investors to a strategic buyer
Timeline for the 9 processes, would look as follows:
- Getting ready for investments – stage 1, 2 | 3 – 2 months
- Reaching out potential buyers/ investors – stage 4, 5 | 6 – 2 months
- Analysing term sheet, valuation data room assistance – stage 7 | 1 month
- Deal closure – stage 8 and 9 | 2 months
Stage 1: Understanding and analysing the business structure
We request the companies for information on certain aspects of the business. Some of these points required for understanding the business are as follows:
- Background promoters and KMP’s and their involvement in the business.
- Products and services offered by the company and its USPs.
- Growth drivers (internal and external) of the business, consumption behaviour, revenue drivers, company’s ability to scale, etc.
- Analysing historical trends pertaining to revenue, gross margins, working capital, etc.
- Understanding on competitiveness of the industry and the key entry barriers
- Understanding operational and technological process and their uniqueness.
Stage 2: Preparing marketing collaterals
Based on analysis in stage 1, we prepare following marketing collaterals in a professional manner to produce the same to investors/ buyers which depict the profile of the company.
- Teaser and cover letter: A teaser is a one- or two-page document used for introducing the company to the potential buyers which communicates all USPs and key points. The document does not include the name of the company to protect the company from any damages that may occur if the word gets out about the promoters selling the company. This document is primarily prepared for a sell-side.
Information Memorandum (‘IM’): IM is the detailed profile of the company which enables the potential buyer to confirm their interest in investing in the company. Some of the key points that should be part of IM are as follow
Company profile including historical milestones, operational facility details, locations,
Products/ services provided by the company that adds value to the company,
Employees and breadth of the team, execution capability and strategies formulated for recovery from failure situations,Customer’s profiles, marketing strategies, distribution channels, market share and growth strategy,
USPs,
Revenue model, top cash burner items,
Competitors and industry analysis, strategies to tap opportunities and adapting to changing environment,
Unique policies for routine activities such as regularly ensuring transparency and compliances, monthly or weekly MIS, strong organization policies and being statutory compliant,
Unique for fundraising-
Focus on future growth and analyse the allocation of funds for future growth,
How earlier fundraises helped build credibility and validation
Unique for sell-side
Focus is on historical growth
Milestones achieved so far such as revenues, key long customers and geographical locations
Total production capacities and asset base
- Business Model (‘BM’): It is a spreadsheet which depicts the projections based on historical analysis and the management estimates. It is essential to prepare BM for sell-side and fundraising as it gives an idea to investors in number format and enables them to make a more informed decision with key financial metrics.
Stage 3: How to decide potential investors/ buyers
- Potential_ investors’ list: This list is made when a company is looking for a fundraise. We reach out to at least 150 to 200 potential investors, which include venture capitalists, private equity funds, family offices, high net worth individuals, etc. Also, one should keep in mind the sector of interest of the investor, ticket size, investment strategy and geography where the investors would primarily invest.
- Potential buyers’ list: It is primarily put together for a sell-side. For preparing this list one should look for strategic buyers/ buyout funds, competitors in the same industry looking for buyouts, conglomerates looking for inorganic buyouts and companies like these which will benefit from buying the company (not only for profit making purposes). We normally look for the companies having revenue at least 3x revenue of seller. We cast a very wide network with all the possible buyers which will normally go up to 800 to 1,000 buyers. Also, we create a hotlist of ~100 buyers that shall be given priority over others in the list as they will have more interest than others in buying the business.
We refer our own network, databases, industry magazines, news articles, client references, previous same industry deal contracts to prepare these lists.
Stage 4: Approaching potential investors/ buyers
Stage 1 to stage 3 takes approximately 2 months and after preparing the investors/ buyers list we start approaching them.
- In sell-side, since the potential targets is 500+, we mass mail the brief opportunity along with teaser and send the physical copies of teasers and cover letters.
- However, in fundraising physical copies may not be required.
- We use different types of social networking sites such as LinkedIn, WhatsApp, Gmail, etc to reach out to the investors/ buyers and follow up with them.
- Meetings are set up with the interested investors and promoters
Stage 5: Q&A by potential investors/ buyers
We compile the questions received from interested investors and segregate them into various areas such as operations, financials, transaction, marketing, employees, etc in one document. We share that document with all interested parties to give them confidence on crucial areas and creating indirect competition among the potential investors.
Stage 6: Receiving offers and priority follow ups
During this stage we prioritise the follow ups based on the responses from investors/ buyers on IM, Q&A and management meetings and ensure hotlists are further followed up on priority. The IM-holders are updated with current position of the company. When the investors/ buyers indicate an interest in investing/ buying then the negotiations part begins. All the offers are summarised, and the competition drives the value. Then our client reviews the offers and finalises the investor/ buyer.
Stage 7: Data room assistance and valuation
During this stage we help our client with setting up data room so that due diligence can be completed on time – Time kills all deals! We also help our client for valuing the business so that they can have a clear idea about the value of the deal. You can visit our website https://acumenfc.co.in/ for more information on set up of Data room and Valuation.
Stage 8 & 9: Due diligence, shareholder agreement and deal closure
During this stage, the investor/ buyer performs due diligence of the company for which the company is already prepared, along with its data room. Various types of due diligences include accounting and financial, commercial, legal, tax, human resource, etc. Post diligence adjustments, understanding the real worth of investing, comes the part where negotiations begin, with certain conditions which can be precedent or subsequent to the closure of the deal. Several documents need to be prepared such as share subscription agreement (in case of further issue of shares), share purchase agreement (in case of buying of shares from another shareholder).
And finally, this arduous process comes to an end with closure of the deal where final transaction agreements are executed and funds are received by company/ sellers.