Key documents in capital raising

26 Nov, 2020 - 00:11 0 Views
Key documents in capital raising

The Herald

Godknows Hofisi

Capital raising or raising business finance, which is part of corporate finance, is central to every business. Such finances can be raised through various methods which include:

Own savings,

Funding by shareholders, also known as equity funding and may involve subscription for shares by high net worth individuals and institutional investors such as other companies, private equity firms, pension funds and others,

Supplies on credit or terms,

Customer deposits,

Borrowings from financial institutions, family or friends, or high net worth individuals,

Profit sharing arrangements or joint ventures,

Sale and leaseback of assets, etc.

Key documents in capital raising

Various documents are used in capital raising and it is important to understand them especially their business or financial implications and also their legal implications. Some of the key documents are explained below.

Mandate

Where a business engages a consultant to help it raise business finance its advisable to sign a mandate document or agreement appointing the consultant, clearly spelling out for example the terms of reference and fees for the consultant.

Non–Disclosure Agreements (NDA)

An NDA is basically an agreement between parties to or who are contemplating a business arrangement wherein the parties bind each other not to disclose to third parties confidential information about the business arrangement without the prior consent of either party.

Such an agreement usually defines what constitutes confidential information, breach thereof, consequence of  breach, dispute resolution and so on.

Non-Circumvention Agreement

This is an agreement between parties in which the parties agree that no party should circumvent or avoid the other, during the currency of the agreement, to the detriment of the party being avoided. This is useful so that no party gets useful information or solutions from the other and then walks out on the agreement, for example to deal with a third party known through the one being avoided, or use information obtained to one’s benefit at the expense or determent of the party providing the information.

It is common to find an NDA and NCA combined into one document.

Information Memorandum (Info Memo)

An Info Memo is a summary document prepared by or for the benefit of a party such as a private company wishing to raise capital.

The document, which has many variations but has to be articulate, may cover aspects such as purpose of the info memo, key terms and definitions, executive summary, history of the company, vision, mission, values, overview of the industry, overview of the company’s operations, future operations of the company, marketing plan, operational considerations, risk analysis and mitigation, analyses such as SWOT, PESTELEG, Porter’s 5 Forces.

Other areas covered include critical success factors, funding being sought, purpose, preferred funding method or structure, financial projections, volume projections, historical financial performance, profile of directors, management, etc.

Business plan

To a large extent a business plan, which also has many variations, contains the same information as the Info Memo but in more detail. It is for internal use. It may include more sensitive information such as key strategies, etc.

Prospectus

In the case of a public company wishing to raise equity funding from the public use is made of the prospectus. The new Companies and Other Business Entities Act (Chapter 24:31) provides for the prospectus in sections 103-114.

Term Sheet

This is a brief document usually presented by a financial institution or prospective financier summarising key aspects of the proposed financing arrangement, for example a loan. It may include aspects such as amount, type of instrument or facility, tenure, interest rate, security, establishment costs, etc.

Cashflow projections

Lenders or financiers normally request financial projections in the form of cashflows. Great care should be taken in preparing the projections and to demonstrate viability. In the case of borrowings demonstrable ability to repay is key. The cashflow projection should be supported by key and reasonable assumptions.

Management accounts

Lenders or financiers may request management accounts instead of annual financial statements. Management accounts are usually more recent as they are prepared monthly in most cases.

Historical performance

This may be in the form of volumes, market share and financial results. Audited financial statements are usually preferred. In some instances lenders may request financial statements that have been reviewed by professional accountants if audited financial statements are not available.

Shareholder and directors

Details of current shareholders and directors are usually requested.

Organogram and profiles of senior management

Details of the business’ organogram (organisational human resources structure) and profiles of senior management may be requested.

Major products and markets

Financiers and lenders may request details of a business’ main products and markets.

Main customers and suppliers

A listing of a business’ main customers and suppliers may be required. In some instances key contracts may be requested.

Financing structure

Prospective lenders or financiers may request details of the current and preferred debt — equity structure.

Key agreements

If capital raising is successful this may culminate in key agreements such as:

Borrowing facilities agreements incorporating loans, overdrafts, bankers’ acceptances, etc.

Shareholder agreement,

Share subscription or allotment agreements,

Share purchase / transfer agreements,

Joint Venture agreement,

Profit sharing agreement,

Sale and lease back agreement,

Mergers and acquisitions

Conclusion

Capital raising is a specialist area especially a the amounts increase or structures become complex. Capital can be a constraint to success, growth or even survival.

A party needs to understand capital raising from a business or financial and also be protected on the legal side. Corporate finance is not understood by many people.

Godknows Hofisi, LLB(UNISA), B Acc(UZ), CA(Z), MBA(EBS,UK) is a legal practitioner / conveyancer, chartered accountant, corporate rescue practitioner, and consultant in deal structuring and tax. He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected]

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