RESOURCES
Team
Investment Banker
An investment banker can play a number of roles in a recapitalization, depending on the complexity of the transaction. For example, if the various shareholders are unable to agree on a price for the shares being sold, an investment banker can perform an independent valuation analysis. In addition, if the shareholders require third party financing, an investment banker can help prepare an information memorandum targeted at different investors, distribute it and receive and evaluate term sheets or offers from interested parties.
Your investment banker should have experience in the following areas:
- Building comprehensive financial models of the historical and future projections of companies in the context of a change to the capital structure.
- Valuing private companies.
- Negotiating the terms of purchase agreements on behalf of buyers of private companies.
- Preparing financing memorandums for raising capital for private companies.
- Negotiating the terms of financing with sources of senior debt, subordinated debt and equity.
Corporate Attorney
Selecting the right attorney and law firm is critical to properly drafting purchase and sale agreements and possibly assisting with intercreditor issues. Whereas an investment banker should be selected based on the individual's experience, it is important that the attorney you select is with a law firm that has the right set of capabilities. You should avoid selecting an attorney based on your prior experience or friendships, if the attorney and his firm does not have the proper experience and capabilities.
Your attorney should spend most of his time doing corporate transaction work. His law firm should have a substantial corporate transaction practice. Because thousands of attorneys fit this criteria, you have the ability to demand the best.
Your attorney and law firm may need to have experience in the following areas:
- Negotiating the terms-of-purchase agreements on behalf of buyers of private companies.
- Negotiating the terms of financing with sources of senior debt, subordinated debt and equity.
- Negotiating intercreditor agreements
- Orchestrating the close of buyouts on behalf of buyers.
Senior Lender
Once you've analyzed the company's debt capacity and determined it is able to raise senior debt, the easiest way to choose a lender is to distribute an information memorandum and request term sheets. Your investment banker will know lenders who will be interested in your type of deal and will handle the process of receiving and analyzing term sheets.
You should choose a senior lender based on the competitiveness of the terms that he proposes. The key issues to analyze include:
- Interest rate
- Length of loan and maturity
- Amortization schedule
- Prepayment penalties
- Financial covenants
Subordinated Lender
Subordinated lenders include: banks, mezzanine funds, pensions, insurance companies and wealthy individuals. The process of raising subordinated funds is similar to the process of raising senior loans. Potential lenders will require an information memorandum and financial model in order to gauge their interest in the deal. They will want to meet the management team and perform the same sort of due diligence as other investors. Your investment banker should handle the process of contacting subordinated lenders and receiving and evaluating term sheets from them.
Key considerations include:
- Interest rate
- Warrant position (if any)
- Length of loan ("term") and maturity
- Amortization schedule
- Prepayment penalties
- Financial covenants
Equity Sponsor
Equity sponsors are usually private partnerships which have raised a fund of capital from institutional investors such as insurance companies, universities, and pensions. An equity investor will require an information memorandum and financial model in order to do preliminary analysis. He will want to meet the management team and perform due diligence.
While the terms of the investment are very important, it is also important to consider the investor's ability to add value to the business. Because the investor will likely have representation on the board of directors, his or her knowledge of the issues surrounding the industry is very important. Also, the company seeking financing may need a deep-pocketed financial partner to fund future growth. So you may need to evaluate the incoming investor's appetite for investing more money in the future.
You may also want to consider whether the investor has a specific timeline for exiting the investment. Equity sponsors often raise funds with a targeted lifetime and an internal rate of return of 30 percent or more. Because of the targeted lifetime, sponsors often try to liquidate their investment in three to five years.