After an Independent Sponsor obtains a Letter of Intent (LOI) to purchase a company, the end goal is to successfully close the transaction. However, between obtaining the LOI and closing there are a lot of things that must happen. The most important is arguably getting capital sources interested in financing their transaction.
For over 20 years, Frisch Capital has been helping Independent Sponsors successfully raise the capital for their transactions. Yet the process is never easy and there are many pitfalls that Independent Sponsors should be aware of. The first is perhaps the most obvious …. Don’t go out into the market to raise capital without really good materials. Capital sources are busy people and don’t have the time or patience to wade through poorly presented materials. While this doesn’t mean you have to recreate “the wheel”, it does mean the information you share has to make sense and be clear. Preparing that information takes time. We here at Frisch Capital work incredibly quickly getting our Independent Sponsor clients and their deal into the market, but we also know it must be done right. Preparation is crucial.
It also takes a few days for the team here at Frisch Capital to get to know our Independent Sponsors themselves, as well as, their deals. Our team will soon be on the phones everyday talking to scores of capital sources about our client’s deal. We know we will be selling both the deal and, just as importantly, our Independent Sponsor client, themselves. To be successful, we know the time invested up front getting to get to know our clients and their deals pays big dividends. After preparing the information package and coaching our client for upcoming possible conference calls, Frisch Capital begins speaking to capital sources. After our initial conversations, we arrange conference calls introducing the Independent Sponsor to interested capital sources. The goal is to have capital sources become vested in the transaction and the Independent Sponsor so that they then provide term sheets.
A term sheet is a non-binding proposal from a capital source. It will contain some specifics (though not all) related to how their capital could be deployed in the deal (amounts, costs, fees and other terms, etc.) In our view here at Frisch Capital, the important feature isn’t just the terms (term sheets will vary dramatically from capital source to capital source) but the fact the term sheets/proposals are in writing. Obtaining term sheets are a very positive step in the capital raising process. It’s important to understand that this does not commit a capital source to completing the transaction. It simply is a document of interest and let’s our Independent Sponsor evaluate the capital source providers and their terms if they were to do the deal.
While speed is important in getting a deal done, and getting term sheets quickly is a goal, it is important to note… speed is not equal to quality. When it comes to term sheets you want quality and quantity, as well as, speed. When an Independent Sponsor asks us here at Frisch Capital, “How quickly can you get me term sheets?”. It is not an easy question.
Capital sources are looking at and working on multiple deals at any given time. They may be conducting due diligence on multiple deals while closing others. It may take some time for them to truly focus on a new deal. Having capital sources “dig in” takes some time. The process of receiving term sheets varies; each deal is different. Sometimes the early term sheets received don’t hold up because the capital source has not done enough due diligence or has partners who weren’t brought up to speed before the term sheet was sent. Speed is not the most important factor ... quality and reliability are far more important.
Recently Frisch Capital was working on a transaction and almost immediately got two interested parties that submitted term sheets. Soon, they backed out. Again, speed does not equal quality or guarantee success getting to closing. However, Frisch Capital focuses on QUANTITY (obtaining multiple term sheets from a lot of capital providers who are interested), as well as, QUALITY. So as soon as the first two capital sources backed out, the Frisch Team had already lined up the next two parties who were waiting “in the wings”. Ironically, it turns out that the best quality proposal was also one of the last capital sources to submit a term sheet. Frisch Capital had been reaching out to them for some time, however they had been in the middle of closing two other transactions and did not have time to look at our deal early on. When they did, they jumped on it with the same level of commitment and speed that they had shown Frisch Capital on previous deals and the deal closed with them. Speed … important…. Quality and Reliability… crucial!
One final important note: The most common mistake that Frisch Capital sees is that Independent Sponsors get overly confident in the first term sheet that comes in. Because they have a lot to do, they stop talking to capital providers and don’t get backups. They don’t have quantity… huge mistake. Many times over the years Independent Sponsors have come to us with a deal that only has a few days left on their LOI. Turns out they had made a few initial calls to a few capital sources, one or two said they were interested and the Independent Sponsor started moving down the track with one of them. The Independent Sponsor stopped calling other capital sources because, in their own words “THEY WERE TOO BUSY ON THE MANY OTHER PARTS OF THE DEAL” and they thought the one they locked onto would get to closing. Unfortunately, they were wrong. The capital source backed out and they were left with no capital provider and an LOI that was about to expire.
We hear the story often. Fortunately for the Independent Sponsor, Frisch Capital is often able to quickly take the deal back into the market and find interested parties to move toward closing. However for every deal we save we hear about another deal that was lost because a single capital partner backed out at the last minute and the LOI ran out. Speed is important, but quantity is crucial.
Finally in addition to safety, having multiple term sheets brings in competition and that most assuredly leads to a better deal for our Independent Sponsor. While many Independent Sponsors could bring in their own backups and competition, it takes a large amount of time and effort and this all has to happen during a short period of time (think LOI exclusivity deadline). The Independent Sponsor needs to focus on the seller, due diligence, Q of E, appraisals, legal issues and many other things, not to mention getting ready to run the company. By engaging professionals such as Frisch Capital early on to raise the capital and provide backups, (“certainty of closing” and competition), an Independent Sponsor has a much greater chance of a truly great deal for themselves and a successful closing.