Highlights of The Capital Raising Seminar 2018
‘An experienced Private Equity investor can be a very useful partner who brings in more than just money’. This is one among many of the nuggets shared by practitioners from I&M Burbidge Capital (IMBC), I&M Bank, IFC Africa, Ethos Private Equity, RSM East Africa, Walker Kontos and ISBI Institute @ Strathmore (ISBI) that gathered at Strathmore Business School (SBS) for a Capital Raising Seminar, a 2-day event organised by ISBI Institute @ Strathmore and I&M Burbidge Capital (IMBC). The main objective of this seminar was to offer the leading industry practitioners the platform to share their knowledge and expertise in the field with successful business owners looking to raise capital.
The seminar started with running through scenarios when raising capital is meaningful as well as a step-by-step process of how the capital is raised. The first step, known as transaction structuring , involves valuation of your company and determining which sources of finance would suit you best. Participants were introduced to various sources of capital including conventional bank loans, private equity and mezzanine funds. IFC representative highlighted the function of development finance in providing capital. Insights on how to make your business attractive to all these sources were shared.
Putting a price tag on your business is never done using only one method, rather it combines several valuation methodologies in order to come up with the most objective figure. Discounted Cash Flow (DCF) methodology takes best into account the company’s particularities, but the discount rate to apply may be very controversial. That’s why Market or Transaction Multiples are always involved to understand the range at which similar companies in similar industries are traded at. Asset-based valuation is not business valuation in classical understanding, since it doesn’t estimate the future cash flows, but the available assets of the company. It rather gives an understanding of the minimum price you’d achieve if you simply sold your company’s assets as second-hand. In the end though, the true value of an entity is what is agreed to between a willing buyer and a willing seller, because subjective reasons of the investor, e.g. strategic importance of penetrating a market or vertical integration into another industry, may increase the intrinsic value of the enterprise in the eyes of the buyer.
After the rough pricing range of a company is established, transaction marketing follows. During this stage you approach potential investors and start negotiations on price offers. Your core focus at this stage is on how you will present your business in the most attractive way without giving away any confidential information. The third step in the capital raising process involves due diligence and commercial negotiations. It is the most crucial step. This is where investors carry out a detailed due diligence of the commercial, financial and legal aspects of your business. Signing confidentiality agreements is crucial at this stage, since you disclose a lot of sensitive information in the process. Next to the due diligence, the tax session touched upon the fiscal aspect of structuring a deal. Tax issues play a crucial role, such that if not taken into consideration an otherwise successful transaction may be sentenced to failure from the start.
You may be engaged in negotiations with several potential investors in search of the best deal. While negotiating, always capitalize on future potential. You are rarely selling second-hand assets, but the ability of your team to deliver future cash flows. Your most important goal, over and above that of securing immediate funding, should be to foster a beneficial long-term relationship. Negotiation is very much a psychological process. The latest developments in the neurological science have brought us many useful insights on how to conduct negotiations effectively. It is not as important to squeeze your counterpart now for a few thousands, as to establish a fruitful relationship for the future. As negotiations end and investment is almost secured, ensure that there is correct and clear transaction documentation.
Capital raising does not only entail raising funds. Most entrepreneurs focus on the investor that offers the highest amount for the least number of shares. But getting a partner into your business is similar to marriage. The entrepreneur should evaluate whether the funding is ‘smart money’ or not. You need an investor who brings in networks and knowhow, one who can be able to help your business plug in talent gaps. The business owner therefore needs to recognize where the business is lacking certain expertise, before seeking out an investor. Most entrepreneurs go for the money and overvalue their businesses. This makes it less attractive to investors who in the long-run would want to gain some return on their investment.
Completion is the last step, when whatever was agreed upon in the transaction documents is now executed.
The seminar concluded with a panel discussion when investors and businesses who had gone through capital raising shared their experiences and know-how with the audience. The event was crowned with a graduation ceremony led by the vice-dean of SBS for Executive Training Dr. Angela Ndunge and followed by a cocktail hosted by the I&M Bank. Networking between the participants during the two intensive days formed just as an invaluable and informative part of the event as the sessions themselves. Check out the photos.
