Roadmap to a Financing Transaction That Works
by Jim Pitrat, CPA, SLGG Partner
Completing a major financing transaction can be difficult. Whether it is angel financing, bridge debt, venture capital, or senior debt financing, many entrepreneurs do not take the steps necessary to ensure that the transaction occurs as smoothly as possible. Transactions can fall apart before they get started because the company simply is not prepared. Of course, nothing can guarantee that you will be able to raise capital, but there are some steps you can take to provide you and your company with the best possible odds.
Know your financing needs
You should know exactly what kind of financing you are looking for and how much you want to give away to get it. There are many types of innovative financing instruments out there and they all serve a different purpose and have different costs to the company, and its shareholders and debtors. Different kinds of financing, whether from angel investors, later round venture capital or debt financing, require different expectations from the company. For instance, earlier rounds of financing are going to be more expensive than later rounds, and generally involve equity financing. Or, you may be looking to place short-term bridge notes with attached warrants if you are looking to span a short time period from your previous round to an IPO or later round of equity financing. You will also need to know how much money you need and have the information to support it.
Hire the correct management and advisory team
In real estate, it may be location, location, location; but in venture capital and finance, it is management, management, management! Before they invest, financiers want to know who is managing their investment. Investors want to see that you have the people in place to accomplish the plan as presented to them. It is important that you realize that you as the entrepreneur are not necessarily the person to manage the enterprise. You should hire qualified people that have experience in your industry and who have experience and understanding of the types of financing transactions that you will be initiating. If you are undertaking an IPO, look for management that has experience with a successful IPO, and if you are an entertainment-related company, consider approaching someone with experience and contacts in the entertainment industry. Also, seek out a board of directors that will provide credibility for the company and potential investors.
Your advisory board can provide needed and valuable guidance through any transaction. They may also be able to refer you to funding sources such as bankers and venture capitalists and they can add credibility to your offering. So, it is very important that you retain the right ones. This means you should retain attorneys that have experience with the types of transactions you will be entering into and accountants that also have the needed expertise. For example, only accountants that are members of the American Institute of Certified Public Accountant’s SEC practice sections should be retained if you plan on eventually filing for an IPO due to their expertise with and understanding of the myriad of securities-related transactions you may enter into, and these transactions’ potential impact on the financial position of your company.
Prepare a well-written business plan
You should have prepared a well-written and thoroughly researched business plan that explains your goals and objectives and what you expect your company to achieve. The plan should address the size of the market in which you will compete and your company’s expected penetration over time. It should include financial projections that are grounded in reality and have supportable assumptions. The plan should also include information on the product or service that you intend to bring to market and the time line to do so, as well as the expected use of the financing you are seeking. All business plans should start with a short (1 page or less) executive summary that details in a very concise format the basics of your plan as well as the financing you are seeking.
Maintain accurate financial records
You should maintain your company’s records in an organized fashion that provides for accurate financial reporting and compliance with the company’s corporate governance policies. You should have an effective system for capturing the company’s financial transactions in your financial statements; approval and documentation of all transactions in the company’s stock, stock options or ownership interests; and proper approval of all significant transactions in accordance with your operating agreement or bylaws. You should also segregate your business and personal expenses and activities in the accounts of your company. Additionally, you should maintain compliance with all tax, securities and regulatory laws and authorities to which the company is accountable. You may consider having your financial statements audited or reviewed by independent accountants on an annual basis, as some financing sources will require it, and as it demonstrates your commitment to financial control. You will have no excuse if your deal disintegrates because the attorneys or bankers could not complete their due-diligence process because your records are too disorganized or missing altogether.
You can never ensure a successful financing transaction, as the variables are just too numerous. However, you can minimize the potential for failure by taking these steps. Investors and bankers are looking for companies that will minimize their exposure and maximize their potential for their required return on investment. Thousands of companies look for financing every year; not all of them come out with cash in hand. Your success may well depend on how prepared you are.
Jim Pitrat, CPA is a Partner at Singer Lewak Greenbaum & Goldstein LLP, Certified Public Accountants & Management Consultants. He can reached at jpitrat@slgg.com.
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