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
- Growing business needing equity for growth
- Distressed business needing equity for turnaround
- 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.
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 |