Apohan Corporate Consultants Private Limited

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Financial Turnaround of SMBs through Equity Funding & other Strategic Initiatives

Apohan Corporate Consultants Pvt. Ltd. > Mergers & acquisitions > Financial Turnaround of SMBs through Equity Funding & other Strategic Initiatives

Importance of financial circumstances during M&A:

The company benefits that does the merger and acquisition activity in good times. The company suffers huge financial losses that does merger and acquisition activity in haste and tough financial times. Three types of circumstances of a company. They decide the bargaining power of the company in the M&A transaction.

Following  are the three types of M&A based on the financial circumstances of a company

  1. Growing business needing equity for growth
  2. Distressed business needing equity for turnaround
  3.  Introvert business suddenly looking at acquisition opportunities or becoming a target

Reasons for financial distress

First generation technocrat promoters never line-up adequate over basic engineering cost. The total project cost including all one-time expenses in the beginning, capitalized or not, till stabilization are around 30% more than base project cost. Above that is required working capital for operations beyond break-even which varies widely. The business fails even before standing up. This is called wrong estimation of total project cost & corresponding inadequate mobilization of capital. If you combine any two points below, you will come across many such stories of corporate failures. Technocrat promoters well manage the technical aspects but they can’t see the financial & contractual complexity & implications of the same.

Reasons for financial distress of businesses

 

It is best to get equity when going is good


 

Lesson: Financial situation goes on at an accelerating pace as distress compounds distress. Banks close the door & none except the strategic investors who understand your market, sector & expertise can appreciate that your business can regain the glory. Looking at the lower valuation & stories of successful turnarounds even financial investors have formed distress funds. Business needs to keep keen eye on financial trends & do something to arrest the fall or gradually diversify.

Equity finance in financial distress for turnaround:

Distress brings down your valuation, business reputation & liquidity rapidly. Act quickly.

A company has the least bargaining power and minimum time available to turnaround through equity funding. Turnaround is the most difficult kind of equity funding initiatives. Apohan has special expertise in turnaround of financially distressed companies. The investors are highly skeptical about the very viability of a business in financial district. They are more so when it comes to a private limited company in which the compliance requirement and the transparency is very less. Generally, the investors do not go to the root cause of financial distress. If the business is intrinsically viable, profitable, able to generate expected rate of return, if the management is ethical, and if the offer made to the investors is attractive, it is not very difficult to achieve a financial turnaround through equity investment.

Banks are useless  or rather brutal – Don’t ever pin your hopes on their assistance, exemptions, relaxations, restructuring & enhanced credit

Apohan’s market survey shows that the lending institutions, banks and other lenders are of no use in the times of financial distress. They just don’t believe that a turnaround is possible. Even if they believe, they don’t have the risk appetite. And even if someone does have the risk appetite, they don’t have sufficient authority in the institution to disburse the funds. Equity funding is a good resource to the small and medium enterprises. A lot of novel initiatives of restructuring the company on various fronts have to be undertaken for a successful turnaround.

Be psychologically strong, help them who want to help you

One of the important aspects of turnaround financing is understanding the psychological condition of the business owner and having empathy for the same. Having to lose all the fortunes made till date, having to lose the capital brought from own pocket in the beginning, repeated reminders of the creditors, repeated reminders of the suppliers, and the banks process of recovery including auction of the personal assets of the promoters and the guarantors results in a very depressing situation for the business person. Such kind of financial turnaround also becomes a very challenging process for a merger and acquisition consultant.

Circumstances of financial distress

  • Employee payment defaults
  • Supplier payment defaults
  • Working capital shortfall to operate beyond break-even capacity
  • Working capital shortfall to operate below break-even capacity to minimize losses
  • Inability to meet financial liabilities fully
  • Bank term-loan becoming Non-performing Asset (NPA)
  • Litigation in Lok Adalat by creditors
  • Litigation under SARFAESI for recovery
  • Strategic debt restructuring
  • A case with Debt Recovery Tribunal (DRT) by creditors
  • Asset reconstruction
  • CIRP under IBC process
  • High Court/ Supreme Court cases for recovery
  • Loss making but still viable business if capital is made available
  • Negative net-worth
  • Liquidation

Apohan’s services in financial turnaround:

At Apohan, we study whether a business is unviable, has become unviable or is still viable with infusion of equity. If a business has lost substantial value or if there is likelihood of liquidation or auction of personal properties of promoters & guarantors, we can still conserve maximum possible value.

Following are the Apohan’s services for M&A of Indian SME businesses:

1 Client-Apohan non-disclosure agreement (NDA)
2 M&A consulting proposal
3 M&A consulting contract
4 M&A process presentation
5 Business profile/Promoter profile
6 Profile of target company/investor
7 Inception report
8 Schedule of investment requirement
9 Analysis of basic Financial documents
10 Analysis of basic corporate documentation
11 Consultant’s plant / facility visit
12 Teaser (MS Word)  (Anonymous)
13 Business presentation (PPT) (Anonymous)
14 Information memorandum, if needed
15 Data sheet (if required)
16 Business plan
17 Formulation of deal strategy
18 Preparation of strategic options
19 Financial / Valuation model (MS Excel)
20 Advertisement drafts for online media
21 Advertisement drafts for physical media
22 Circulation of advertise to investors
23 Shortlisting of eligible investors
24 Identification of the investor
25 Mutual NDA (Client & Investor)
26 Investor’s plant/ facility visit
27 Preliminary due-deligence of investor
28 Presentation to investor
29 Investor proposal/ offer analysis
30 Financial / contractual negotiations
31 Deal Structure (transaction type, instrument type, transaction details)
32 Term-sheet for contract
33 Document list for data room
34 Assistance in seller due diligence
35 Assistance in reverse due diligence, if needed
36 Handling of investor’s query
37 Draft investment contract /BTA/scheme
38 Final Investment contract
39 Closure of Deal / Execution of contract
40 Amendment drafts in MOA/AOA
41 Board / GM resolution drafts
42 Disbursment of Funds
43 Accounting of M&A deal
44 Taxation of M&A deal
45 Issue of equity / securty to investor
46 Handholding for 6 months
47 Monthly Status Report
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