Stephen Craik is a partner and head of private equity for KPMG Corporate Finance in the Midlands. LDC is now ranked as one of the top two mid-market private equity houses in the UK.
The Corporate
Finance Environment
Strategic Considerations – Making the Right Choice
The nature of corporate finance
The providers of finance may be shareholders in the business, both existing and those who become shareholders as a result of the transaction, and the funds so provided are classified as equity. If the provider of funds does not become a shareholder in the business, the funds may be classified as debt, although in certain circumstances debt may take on the characteristics of equity.
The need for strategic thinking
In addition to assisting when new transactions are made, corporate financial advisors should be able to assist in restructuring the existing capital structure of a business if appropriate. Such an ability may be borne from the understanding that, for example, a sale may be better delayed, or that it may be better to borrow rather than to dilute shares, or that the only way to ensure the right level of funds, may be to give up fairness.
Acquiring capital to implement strategies
Of course, not all decisions made can be judged in hindsight alone, but a strategic thinking process in the context of corporate finance can lead to better decision-making, with the ability to respond to circumstances in change in an orderly and structured manner. way.
The corporate finance adviser as strategy consultant
A good place to start might be the motivations, goals and objectives of the shareholders and/or directors for the future development of the company. As for the company itself, management and their advisors must be satisfied that there has been sufficient research to identify the company's position in its marketplace.
Financial Market and
Business Conditions for SMEs
18 billion, but overseas acquisitions in the first six months of 2001 fell to 170 transactions worth £26.5 billion. Similarly, acquisitions by foreign companies in the UK fell from 227 worth £64.6 billion in 2000 to just 79 transactions worth £15.7 billion in the first half of 2001.
Types of corporate finance available to SMEs
The total stock of lending to SMEs reached a record £42.5 billion in September 2000, an increase of more than 14 per cent year on year. Although the UK venture capital industry is the largest and most developed in Europe, it currently invests just over 5 per cent of
Alternative sources of venture capital
Formal private equity is obtained from banks, special investment schemes (some of which are described in Chapter 1.3) and private equity and venture capital firms. Indeed, through the media of the banks and the Small Business Service (SBS), business angels and formal venture capital funds are encouraged to co-invest in SMEs.
Overview of external finance sources for SMEs
In particular, they can generate additional funding; banks are said to contribute to 86 percent of companies receiving financing packages from business angels, and venture capitalists to 25 percent. Business angels who are actively involved in advising or managing the companies they invest in act as magnets for more formal investors and give the company credibility among its customers and suppliers.
Small Business Service (SBS) and SME Finance
Small Business Service (SBS)
The SBIT also advises on SME financing issues in general, including how best to intervene in venture capital markets. All have significant, relevant knowledge and experience, ensuring the credibility of the SBIT within the finance sector and related industries.
Smart
Established in September 2000 with an expected mandate of three years, SBIT consists of 18 members representing a wide range of venture capital investors, 'business angels', microfinance professionals, financial and business advisors as well as banks and other providers. debt financing. A very small number of exceptional development projects can receive up to £450,000 at an agreed interest rate not exceeding 30 per cent.).
Debt finance
Loans of up to £30,000 with some approved lenders are subject to simplified administrative procedures which allow the lender to approve applications without first passing them through to SBS, speeding up the loan decision. The lender will ask SBS for a guarantee that will cover 70 or 85 percent of the loan.
Equity
Co-investors are institutions that do not currently invest in early-stage high-tech venture capital. SBS also supports the Business Angels Network Association (BANA), an industry-wide trade association that aims to
Finance for Technology- based Small Firms
TBSFs)
Defining the TBSF and its financing needs
The difficulties in accessing the necessary financing are likely to change as the firm progresses through these stages. 1994): 'Financial constraints to the growth and development of small high-technology firms', in Hughes, A. eds): Finance and the small firm, Routledge, London.
Alternative sources of finance for TBSFs
Failure to adequately finance any part of the cycle can cause the business to fail, and this in turn will increase the risks for any individual finance provider. However, it appears that in the last six or seven years of the 1990s UK funds outperformed UK funds specializing in later funding.
Conclusion
It is estimated that there are currently around 18,000 current and potential business angels in the UK, investing around £500 million per year, making the business angel market of equal importance to the formal venture capital industry as a potential source of funding for the beginning. oops. Currently, corporate entrepreneurship is undertaken by only a relatively small proportion of UK companies, although in the period leading up to the March 2000 watershed, there was an increased level of activity as more companies set up venture capital units to invest in internet or technology. - offs.
Modern Company Law for a Competitive
Economy – Final Report from the Company Law
Small and private companies
£2.8 million); total assets of up to £2.4 million (currently £1.4 million); no more than 50 employees (as now); d) shortening the deadline for private companies to file accounts from the current ten months to seven months after the end of the financial year. Simplification of the capital maintenance regime for all private companies, in particular the repeal of the current rules on financial support related to the acquisition of shares.
Directors
Shareholders
Company reporting and audit
All listed companies should be required to file accounts at the general meeting within six months of the end of the year and deposit them with Companies House. The duty of care of accountants may not be extended by law beyond what is established through the courts.
Institutional arrangements
Sure, competitor analysis will be easier than ever before, but this is in the interest of the competitors themselves, not the company. The broad direction of the final report of the Company Law Review Steering Committee is an extension of the duties of directors.
Part Two
Debt Finance
Structured Finance
Introduction
Strategic structured finance
In general, structured business finance is used by medium to large SMEs (up to around £60-70m turnover) who require a more flexible funding package than mainstream banks can provide.
Case studies
Crucial to the deal's success was the ability to meet the tight time frame set by the company's original owners for the completion of the deal. However, the NMB-Heller agreement has now secured the company's long-term future.
Asset-based Finance
How to pay for today’s assets with tomorrow’s money
Because financial engineering is their core skill, you must of course also consider the ingenuity of the finance house. The maintenance package can be arranged by the finance house or even by the manufacturer of the asset itself.
Hire purchase
Leasing
The financing house uses its experience to determine the value of the asset when the contract is over. You will make regular payments on the predetermined value of the asset for this period – not for life.
Case study
A financial house should always strive to make the purchase and use of the funds needed to run your business as simple and painless as possible. The Finance and Leasing Association (FLA) is the UK's main representative organization for the asset-based finance industry, representing around 90% of the sector.
Finance for Foreign Trade
Under open account terms, the exporter sends the goods and documents directly to the importer. The risk to the seller lies in the condition of the issuing bank and the risk of the country.
Finance alternatives
Typically, such advances are made on presentation of the beneficiary's simple receipt, possibly accompanied by an invoice. As in the case of a red clause credit, the balance of the value of the goods is owed by the beneficiary on presentation of the documents stipulated in the credit.
Currency fluctuation
Legal Issues for Failing Companies and
Corporate Rescue
Turnaround
If this option is proposed, the directors must not mislead potential investors about the financial position of the company (see Personal position of the directors). If that individual creditor is subsequently 'paid off', the company may have inadvertently entered into a preference (see Personal Position of Directors).
Insolvency procedures
A company is also considered unable to pay its debts (Article 123(2) IA) if it is proved to the court that the value of the company's assets is less than the amount of its liabilities (known as the 'balance sheet' test) . When a company is liquidated, a Liquidator is appointed to take control of the company's assets.
Directors’ personal position and other possible actions
If the court makes such a declaration, it will then make that person liable to make personal contributions to the assets of the company. The relevant period is again two years before the commencement of insolvency (if the transaction is to any person 'connected' with the company) or otherwise during the six months before the commencement of insolvency.
A Glossary of Debt
In case of default, the lender can take control of the asset and sell it to cover the value of the loan. Security is usually in the form of a variable charge against the company's assets.
Part Three
Private Equity
Trends in Private Equity
New sources of money
The British venture capitalist is not a venture capitalist in the true sense of the word. Over the past few years, LDC has become one of the largest and most active venture capitalists in the UK (it is the leading investor in the mid-market sector).
The Encon story
Despite the trading results, the fundamentals of the business were sound and continuously improving. LDC and two of the remaining four co-investors agreed on a capital restructuring, and management and Bank of Scotland were involved in the negotiations at every stage.
Shaping Up for the Market
Focus on strengths
Gain critical mass
Geographic or sector coverage
Put yourself in the position of a potential buyer and think about what would stand out to them about this business. Because the world is getting smaller, geographic growth flows more easily and faster than in the past.
Intellectual property and barriers to entry
People and incentives
Sale planning
Flexible focus
Entrepreneurs
It is far better to get some clear advice about the prospects for success at the beginning of your efforts to raise venture capital funding than to work hard in vain for months. That said, it is always helpful to weigh the odds initially through discussion with experienced advisors and then use their experience to the maximum to improve the likelihood of success.
Getting started
Creating the business plan and investment proposal
The plan should also include a clear analysis of the funding needed, the source of that funding, including bank, asset finance and equity, and its use to implement the plan. You should also consider debt financing, which can be raised alongside equity to finance the plan.
Dealing with investors
Careful editing will make it more attractive to the investor who sees too many unpleasant plans. By applying this to the completed business plan, you can define the offer that is likely to interest the investor.
Small print
It is important to get a clear response from this initial meeting, whether positive or negative. The conclusion of this stage is the decision on which investor gets exclusivity to settle.
Summary
A short exclusivity period of six weeks is realistic to allow the investor to conduct due diligence and complete legal documentation.
Legal Due Diligence Issues
Contracts
Typically, many contracts of lesser value will simply be assumed without any formal agreement from the other party to the contract, although this mechanism should not be relied upon and a formal assignment of the agreement should be obtained where the contract is significant – for example, a finance contract relating to an important asset used by the target company. In the absence of any prohibition against the assignment of contracts, the benefits of a contract are generally freely transferable, whereas the assignment of the burden of a contract requires the consent of the person who has the benefit of it (a novation).
Consents
Sometimes, even in a share sale, the consent or approval of another party to the contract will be required under the change of control provisions.
Employees
The obligation under TUPE is not limited to Seller's employees; the relevant employees of the buyer should also be consulted. In commercial terms, many employers find the prospect of discussing a proposed sale of the company with employee representatives completely unacceptable.
Pensions
These are government-designed schemes designed to provide low-cost and low-cost pension provision to employees who previously did not feel they were able to make pension contributions. An employer's obligation in relation to stakeholder pensions is to facilitate pension provision and not, at the moment, to make contributions on behalf of the employee.
Merger control
In the UK, once these limits are crossed, the Office of Fair Trading has the power to investigate the transaction and refer the transaction to the Competition Commission (formerly the Monopolies and Mergers Commission). The Competition Commission or the European Commission has the power to order various legal remedies, including divestment, sales or restrictions of voting power.
City Code (Blue Book)
Anti-competitive practices
In addition, there is a possibility that the target has previously abused its dominant position in the market. Penalties include fines, in the case of Europe-wide markets, of up to 10 percent of the worldwide turnover of the group of companies concerned.
Property issues
A prohibition on abuse would apply to practices such as excessive pricing, the refusal to deal with specific customers or groups of customers, or the imposition of onerous conditions, such as an obligation to purchase further goods and/or services as a condition of the original sale.
Environmental issues
Other current practice compliance issues include dealing with waste management and the possible need for a waste management licence. Even if a waste management license is not required, the producer of the waste will need to ensure that the person disposing of the waste has appropriate licenses and facilities.
Group companies and prior transactions
Part of the benefit of the process is to satisfy the buyer that he is in fact obtaining what he hopes to obtain, and that the benefit of the acquisition will be as expected. In more serious cases, a guarantee or indemnity may be backed up by depositing a portion of the sale proceeds in a separate escrow account, subject to release when the contingency or issue in question is satisfactorily resolved.
Part Four
Public Equity
Flotation
If debt financing is available, this may be attractive, but the additional risk of debt financing to existing shareholders should be considered before deciding on it. If debt financing is not available, sources of equity financing (i.e., debt financing, venture capital, development capital, etc.) should be considered.
Suitability for flotation
Last revision within 6 months no requirement within 6 months (135 days in some cases) Minimum Total Asset Value No Minimum No Minimum No Minimum Value at Posting. The nurturing period can vary from three months to two years, depending on the company's circumstances.
During this period, the financial advisor will attempt to gain a clear understanding of the IPO candidate's activities. "Long Form Report" is the name given to the document that most fully describes the IPO candidate's activities.
Risks of flotation
An additional benefit can be to raise the company's profile with customers or suppliers. It is in the company's best interest, and therefore in the interest of both existing shareholders and management, that the advisers are fully familiar with both the prospects and the risks in the business.
Accordingly, it is impossible to define the “typical” IPO candidate and therefore also impossible to define the associated costs. While the total cost as a percentage of the funds raised can be high, it should be borne in mind that these are one-time costs and once a company goes public, it will usually be able to raise additional capital at a later stage. at a lower relative cost percentage. .
The prospectus is registered with the Registrar of Companies and application is formally made to the relevant UK listing authority (UKLA) for company admission. Approximately one week after the impact day, the company's shares will be admitted to the stock exchange and the deals will begin.
Pricing an offer
If the price does not perform, the 'currency' of the company's shares is less attractive both to investors and to potential acquisition targets. Liquidity is affected by a number of factors, including the number of shareholders, the size of shareholdings and the efficiency of the company's stockbrokers.
Life as a quoted company
It should be borne in mind that an investor who buys shares in a company recognizes that the prospects of the company, relative to the risks, offer a good investment. The investor wants the company to succeed as they will then benefit from it financially.
Public Equity Markets
Functions of public equity
The disadvantage of the latter was that it was largely unregulated and therefore unattractive to many groups of investors, especially institutional private equity investors. A three-tier stock market is now a common structure consisting of an official list, a "junior" market or an official list league for smaller companies with a less demanding entry and trading regime, and an unregulated OTC market.
UK public equity markets
But the recession of the early 1990s caused the flow of new players to dry up. By this time, the LSE had admitted that the official list alone remained insufficient as a channel to provide smaller companies with access to public capital, and despite the USM experience, the Alternative Investment Market (AIM) was established instead.
Pan-European equity markets
OFEX is not regulated by the LSE, J P Jenkins is itself bound by stock exchange and Financial Services Authority (FSA) rules, and OFEX is expected to refer companies, if they qualify, to AIM or an official listing in the medium term. Although a combined market would in principle offer higher capitalization and liquidity and thus more reliable exit routes – the reason for last year's proposed LSE-Deutsche Börse link – the hurdles are huge and the London-Frankfurt project has failed.
Taxation Aspects of Flotation
Tool kit’ regarding relevant tax parameters
The “relevant ownership period” always begins on the last date of acquisition of the asset and on April 6, 1998, and ends on the date of disposal of the asset. If, on the other hand, the asset had been eligible for STR for the entire relevant period of ownership, the taxable profit would have been only £237,500.
Planning issues
For periods before 6 April 2000, shares in a company qualify for BTR in circumstances where:. a) the company concerned was a trading company or the holding company of a trading group; and. i) broadly, the shareholder owned at least 25 percent of the company; or. ii) broadly, the shareholder owned at least 5 percent of the company and was a full-time working employee of the company. Thus, prior to 6 April 2000, in order for the shares to qualify for BTR the relevant shareholder either had to have a reasonably significant (ie 25 per cent plus) stake in a company, or he had to have a substantial (ie 5 per cent plus ) in the company and be a full-time employee.
Legal Aspects of a Company Flotation
The marketing of a publicly traded company's securities is strictly regulated to provide as much protection as practical to potential investors. In addition to the listing rules, particular attention should be paid to the provisions of the Financial Services Act 1986 (FSA), the Financial Services and Markets Act 2000 (FSMA) and the Public Offers of Securities Regulations 1995 (“the POS Regulations”). .
Legal due diligence and pre-float grooming
Once the company's lawyers have obtained this information, they will then produce a detailed due diligence report. It is also common to restructure the company's capital structure to create sufficient share capital to ensure that any shares to be issued can be offered at a price that the market will find attractive.
Company prospectus/listing particulars
The legal advisors will play an active role in the design and preparation of the prospectus and, in particular, the statutory and general informational work dealing with the company, the terms of its founding agreement and articles of association, the directors and their interests in the company, the terms of the directors' employment contracts and remuneration, the company's working capital, schemes stock options outstanding or to be established by the Company, the Company's equity interests, any litigation involving the Company, material contracts (outside the ordinary course of business) involving the Company and taxation. This includes a general disclosure obligation in addition to prospectus content requirements.
Potential liability areas
Such an agreement is likely to include warranties, representations and indemnities from the directors of the Company given to the sponsor or investment bank acting on behalf of the Company. In the event of a breach of any of the warranties, representations and indemnities, the sponsor or merchant bank would be entitled to seek damages from the directors on behalf of buyers or subscribers to securities for any losses they suffer.
Verification
Material changes
One of the purposes of a prospectus is to ensure that all potential investors have the same information regarding the company on which to base their investment decision. It is therefore imperative that internal systems are in place so that none of the directors or senior employees provide a potential investor with information that is not contained in the prospectus or otherwise publicly available in order to influence that investor's decision as to whether or not to apply for shares.
Placing agreement/underwriting agreement
Orderly market
Continuing obligations of directors
In addition, the company is required to adopt the model code for share trading by its directors and certain of its employees. The main requirements of the model code are: a) a director may not deal with securities in the company for reasons of a short-term nature.
Public-to-Private
Transactions are Here to Stay
Several private equity houses, banks and advisors now have strong track records in handling PTP deals, this recognition further facilitates the current strong flow of these transactions.
Candidates for PTP
Key factors in a PTP transaction
This would need to be in place before a private equity house would seriously enter into a deal. Private equity investors will seek returns on their capital and need to be convinced that the adverse trade can be corrected in the short to medium term.
The price of PTP
Beyond 2001
Private equity investors will take advantage of these types of opportunities, especially given the significant levels of funding raised in recent years. Within these opportunities will be PTP transactions, which will remain a feature of the private equity landscape for the foreseeable future.
Mergers and Acquisitions
Buying a Business
Motives for buying
Valuing a business
Structuring a purchase
This is often achieved by the seller remaining involved in a consulting capacity after the purchase, for example, until their deferred consideration is realized. The introduction of a suitable share option scheme is commonly used, giving individuals a sense of personal financial participation in the future growth of the business.
Funding an acquisition
The structure of the debt element is similar to that of owner-operated business, while equity is raised through an offering of new shares in the stock market, often in the form of a rights issue to existing shareholders.
Steps to buying a business
After the proper purpose has been identified, the buyer's management must confirm in detail the commercial strength and financial fit of the organizations. A review of the tax position is essential to ensure there are no material liabilities that are not reflected in the company's accounts and that all relevant legal documents are up to date.
Overview of the sale and purchase agreement (SPA)
Pension due diligence is usually very important to establish whether the target company's scheme is fully funded and to confirm that there are no material obligations to cover any shortfalls. Commercial due diligence is also normally undertaken to consider market conditions, competitor and customer profiles.
Thinking of Selling Your Business?
When is a good time to sell my business?
How much is my business worth?
How long does it take to sell a business?
All businesses must consider how best to position themselves to maximize the value or benefit for the shareholders. An adviser will determine when the business is ready to sell and advise on the practical steps you may need to take to help maximize value.
In addition to the obvious need to sell the business at a point in the economic cycle when the sale of the business is likely to be successful, owners must ensure that the business is properly prepared for exit.
How do I find a buyer if I don’t advertise?
How does the sales process work?
What do I need to tell a buyer?
What about my tax position?
What about my role, and that of my workforce, after the sale?
One of the best ways to ensure a satisfactory outcome for your employees is to ensure that the company goes to 'the right home'.
When do I receive the proceeds from the sale?
What are the risks?
Valuation
However, it is the determination of the market price today that is the purpose of most valuations. The result is that the price a business realizes on sale is often more a matter of chance than the financial value of the business.
Valuation methods
Management makes a difference: it is often difficult to separate the value of a company from the value of its management. It is for this reason that executives regularly involved in assessing the value of companies tend to rely on instincts and rules of thumb rather than the intellectually sound valuation methods recommended by valuation professionals.
