Equity financing procedure (investors, VCs, equity firm)
It is possible that banks cannot finance the growth of your company. At that moment, financing through a private equity firm or informal investor is a good alternative. They can provide additional capital and may provide you with added value in the form of management, network or advice. We, Asia Investment Services have an extensive network of informal investors and venture capital companies and can provide you with excellent guidance in attracting additional capital.
1. The preparation stage of an equity financing procedure
1a. Establish growth strategy
We will discuss your growth strategy with you in one or more discussions. Where do you want to be in 5 years, what actions do you need to take and what are the consequences. This long-term plan can be elaborated in a business plan.
1b. Determine financing needs
A multi-annual budget can be drawn up based on the business plan. In addition to a result budget, this budget consists of a cash flow budget, which includes future investments in assets and working capital. The financing requirement will be determined based on the cash flow.
With the aid of banking standards known to us, an estimate can be made of what part can be financed by banks and what part equity financing is required.
1c. Advise transaction structure
To be able to advise you on the transaction structure and the ownership share of the venture capital company receives for providing capital to your company, insight must first be gained the value of your company.
The valuation is usually done on the Discounted Cash Flow (DCF”) method. This method values a company based on future free cash flows. Besides, other valuation methods could be used, such as the business valuation based on price/earnings ratios and the valuation from paid acquisition prices for comparable transactions.
In cooperation with you tax auditor, we can advise you on a structure that minimises the tax impact of the transaction.
1d. Drafting Participation Memorandum
The Participation Memorandum is the brochure of your company and deals among other things with the activities and market of the company, the legal structure and ownership relations, the future strategy, the normalised financial data including prognoses and the financing requirement.
The memorandum must contain sufficient information for a private equity firm to be able to make a functional analysis of the company and to make an assessment on the desirability of this participation.
2. The financing stage of an equity financing procedure
2a. Approach and inform venture capital
We have specified the preferences and the needed financing requirement, and now a selection can be made of possible to be approached informal investors and venture capital companies. This selection takes into account the amount to be raised, the wishes regarding involvement and the expertise available within the venture capital company.
Approaching the informal investors and private equity companies must be done with great care and preferably first by telephone. Initially, the parties are contacted with an anonymous profile of the company. Only when they show particular interest they can, after signing a confidentiality agreement (NDA non-disclosure agreement), receive the participation memorandum, and an introductory conversation can be arranged.
If the introductory meeting for both parties has been positively experienced, the negotiations will start on the actual participation.
2b. Conducting negotiations
During the discussions, we assist you actively in conducting the negotiations and recording the agreements. Our experience shows that your negotiating position is strengthened because we can act as a buffer and intercessor between the various parties.
In consultation with you, in advance, the negotiation strategy will be determined, which will be in line with the methods of the investors. It must also be decided whether to set an acquisition price or whether a bidding procedure will be started.
To avoid misunderstandings in the follow-up process, it is advisable to document discussions and interim decisions in reports, especially all crucial issues of the transaction, such as the price, the payment conditions, the role and of the influence of the investor and the guarantees to be provided.
2c. Letter of intent
If parties broadly agree with the transaction conditions, those agreements will be stated in a letter of intent. The advantage of drawing up a letter of intent is that it is a binding contract and reduces the chance of misunderstandings in the further process. Also, it can result in significant time savings when drafting the final settlement. We can coordinate the drafting of the letter of intent, which often involves a lot of negotiation.
It is advisable to have the letter of intent drawn up by a specialised transaction attorney. After all, a declaration of intent is not a standard document but always explicitly tailored to the situation.
3. The completion stage of an equity financing procedure
3a. Coordinate due diligence assessment
After signing the letter of intent, but before concluding the final participation agreement, the investor(s) and venture capital company can be given the opportunity to verify the correctness and completeness of the information and financial and legal data provided: a so-called due diligence assessment.
Often the buyer wants her consultants to investigate different areas, such as financial, legal, personnel and organisation, environment, tax, insurance, operational, etc. Collecting all this information, as a rule, without the knowledge and co-operation of the employees is a time-consuming process. The information is collected in a (digital) data room.
If during the due diligence assessment the investor finds significant deviations that were not known or different than expected, this could lead to a breach of trust, adjustments to the transaction conditions or even the non-continuation of the transaction. It is crucial to prevent the private equity firms from finding setbacks and future damage costs as all negative aspects of the company should be known to the participant in the negotiation process.
3b. Negotiation and drafting agreement
If the due diligence assessment does not result in unpleasant surprises, the final contracts can be drawn up. As a basis for this, the letter of intent usually serves. Depending on the transfer structure, various agreements must be drafted, such as the participation agreement, the shareholders’ agreement, the loan agreement and/or a management agreement.