We often get into the discussion around timing in a capital raise situation with potential clients and there are a number of issues that flow from this. But before we get further into the issues, it is worth citing a specific example of our own experience where a multinational deal was done handshake to announcements within six weeks. Clearly a couple of months of meetings – “getting to know you”, “is this business actually real” – took place beforehand, but the six week sprint (I rarely left my computer and telephone) was from a broad agreement of price and structure to completion. This is unusual, but answers one key question – we need the cash within a month, is this possible? No.

So how long does it really take? A key part of this is deciding on the transaction in the first place. Quite often it starts with “we need capital to grow”, however behind this lies a question that should be answered first: “what is our strategy”  then “how does that impact capital requirements?”. One of the main reasons to grow beyond organic rates is to gain scale which is often, but not always, a strategic advantage. But have the shareholders thought through the real reasons for capital?

Is an acquisition the best route to go – and if an acquisition, does it have to be an outright acquisition or can it be a merger, something that happened to a client recently? By going this route you create scale but possibly avoid the difficulty of deploying cash into growth strategies which are less certain than a straightforward merger of two companies. This merger strategy does presuppose that one can get alignment in leadership focus, which you will only establish once meetings are held – a difficult task in a competitive environment. Growth strategies which involve spending more cash on sales, on technology and perhaps production always have the uncertain outcome in sales and therefore successful growth.

A key part of the question of timing then is getting the strategy right, however there is now the chicken and egg question – if the decision is an acquisition or merger, what comes first, the money or the acquisition? In our experience, it is more typical to start with seeking capital and then find acquisitions in the process of that capital raising. The process of this does take time, though, and is often summarised in either a strategy document or investment memorandum, both of which require strong market analysis. This document does help take a conceptual question to a practical series of steps towards securing capital. It also helps with understanding the potential to acquire or merge (or sell out). Whilst putting together an investment memorandum, the research takes time and sometimes spend, in the form of third party industry research.

This also aids the process of compiling an investor list. There are countless potential investors, each of which may have different strategies themselves in terms of sector, geography, stage (seed or series A for example). This process is also time consuming, not only understanding the competitor environment but the investor space. Of course our favourite message here is “where or to whom will you ultimately sell this company that you’re building?” – which is the intention of most entrepreneurs.

Once a deal is conceptually on the table, though, be it a term sheet, a letter of offer or merely a handshake, there is a process, and a distinct change of tempo. This is usually the point where the work effort really starts, both for the advisor and the company; worse, it is uncertain in time. Meetings are ad hoc, often depending on an event such as a letter or agreement to be completed by lawyers who have other clients, or on financial personnel who are under month end or reporting pressure.

One of the most time-consuming periods which can be managed beforehand to a large extent would be due diligence. Due diligence is an exercise by an investor or acquirer to verify details of the investment, such as tax affairs, financial reports, statutory affairs, etc.. If all of this information is readily available in electronic format, and paper where necessary (original certificates, etc.), the timing is substantially shortened, and the risk of the deal falling over due to poor records and non-existent information is lessened considerably.

By this time, it is obvious, a lot of money has been spent by all parties on professional advisors who do not tend to take their fees on risk of closure (unlike transaction advisors). Corniche always advises its clients to carry out due diligence once agreements have been signed (or at least agreed), precisely because a due diligence exercise is validation of the story, not an opportunity to renegotiate terms.

It is also positive if an investor or acquirer uses a professional firm for the due diligence rather than their own personnel – again the scope needs to be clear and using ones own personnel is often a sign that a renegotiation is coming as the investor has not spent material money on the way to the agreements. They can easily walk away if they don’t get a better deal – instead of being invested financially in seeing the deal through to closure. There are a number of South African corporates which were notorious for this kind of behaviour over the last twenty years.

Another technique which lessens the cost for a strategic acquirer, especially legal and due diligence costs, would be to move all the risk back to the vendor. If the vendor signs profit warranties, tax warranties and indemnities and the investor understands the technical and business environment, the investor has a reasonably low risk in the investment.

So what is the message on costs? As the transaction enters the post term sheet period, the costs increase for both parties, dramatically. Anyone involved on risk is at this point particularly exposed as the time required is likewise heavy but the fees are not changing on the basis of time. Also transactions do fail, even on a well planned and well executed transactions.

We usually communicate a time expectation for the total exercise of at least three months with a strong wind behind the process, or up to nine months, which would of course include time for the development of Information Memorandum, target lists and workshops to align expectations, as well as the deal process itself.