Whether you are trying to launch an M&A divestment process or a debt/equity capital raising exercise, preparing well for due diligence and negotiations early will boost your chances of deal success. From our experience, front loading these work streams will ensure that your deal exudes the level of credibility and transparency that investors look for. Failing to do so could result in your deal losing momentum, which could cause unnecessary delays and frustration to all parties involved.
Here are 3 important things to prepare before launching your deal to the universe of potential investors:
1. Prepare for due diligence
- Information memorandum (“IM”): This would typically be the first document scrutinized by potential investors and their advisers. The IM should provide a comprehensive overview of the investment highlights and risks, an industry overview, and should also provide a sense of the financial outputs from the base case financial model.
- Financial model: The vendor’s financial model is particularly useful for adjusting assumptions, check for logical errors and perform sensitivity analysis required by their decision makers. From our experience, this is of utmost importance as investors rely heavily on the vendor’s financial model to make commercial decisions such as loan sizing, capital structuring, business valuation and ultimately, whether to continue or cease action. Poorly designed spreadsheets tend to be a red flag which may put off investors, causing them to lose interest or raise unnecessary suspicions towards your project.
- Data room and Q&A protocols: A data room is a collection of all documents relevant to the underlying asset and transaction. Ideally this should be well categorised and catalogued for quick review. Remember to redact or white-out anything that is commercially sensitive and may compromise your project’s market position. Your competitors could, in some cases, be one of the many parties in your data room! Price sensitive details can subsequently be revealed to parties who are more advanced in the process, at the right time.
- Process letters: Issuing process letters to investors at certain milestones needs to make plain what you are seeking from investors. This also instills a sense of urgency and ultimately creates the deal momentum required to quickly differentiate between the tire-kickers who are more interested in fishing for information, from the serious parties you want to close your deal with.
- Investor presentation: Given the inevitable face-to-face interactions between yourselves and serious potential investors, it would be useful to encapsulate the takeaway points of the IM into an investor presentation.
- Transaction timeline: It is important to set out a timeline of dates and milestones from the onset, and have regular sessions to track progress. During the timeline planning stage, you should factor in black-out periods such as major holiday seasons, and also board meeting dates to ensure momentum is not lost inadvertently.
2. Prepare a target investor status sheet
- Categorisations: Think about the universe of potential investors you wish to approach, and group them accordingly. Investors could fall under one of a few groupings, such as strategic/financial investors, local/international investors, customers/suppliers, etc. It would also be useful to tier them into bands, and that more attention is given to tier 1 or 2 investors. Place contact details of the key decision makers for each investor to be on the same sheet for convenience.
- Status updates: Once you have populated the list, it is usually good practice to divide and conquer – assigning investors to members of your deal team most suited to engaging them. Remember to document their feedback in a systematic fashion so time is not lost trying to recall what was discussed.
- Investor FAQs: With the initial feedback, we recommend uploading responses to frequently-asked questions into a conspicuous part of the data room, or as part of the investor presentation.
3. Prepare for negotiations
- Hire the right advisers and deal specialists: Having a team of advisers by your side would ensure negotiations take place in line with market practice. While the cost of hiring proper advisers is certainly not small, hiring the right advisers would reap dividends in other ways. Having good legal and corporate advisers that you trust increases the credibility of your transaction. Together with their counterparts from the investor’s deal team, they create a forum for horse-trading and discussing difficult conversations during negotiations while preserving goodwill between the principals. And finally, once the deal is signed, advisers help see the deal through to financial close.
- Draft legal agreements and termsheet: Once potential investors are shortlisted, it makes sense to release draft legal agreements relevant to your transaction together with a termsheet that summarises the key commercial and legal items for discussion. It would be useful to have your deal team review the agreements so as to ensure they are familiar with the items that can be traded during negotiation, and those that are absolute must-haves.
Promoters should realise that potential investors need to be kept engaged throughout the deal process. The suggestions we have provided above are aimed at anticipating what investors expect to see during due diligence investigations and negotiations. Front-loading these items prior to deal launch will reduce the time and potential frustration of addressing them after the deal is launched, and increase the success of your deal.