Subject: VCEF

Textbook Chapter 13.1, 14.1, 14.3, 14.6, 14.7 + case at end

Summary

13.1: Buying a startup to enter entrepreneurship

• "Entrepreneurship through acquisition"
• Pros
  • Higher probs of success
  • Start with existing business, immediate cash flow and able to attract investment
  • May be more qualified to lead
  • Ability to pay self
  • Lower entry barriers compare to starting (in some markets)
• Cons
  • History of company may not be perfect
  • Changing strategy and reputation takes time
  • Require significant own resources to buy company
  • Stress levels and risk profile required - high
  • Takes time and effort to buy
  • Often compete with other buyers
• Process
  1. Prepare your search
     • Search strat
     • Acquisition Criteria
     • Personal Pitch
  2. Identify companies
     • Activate network and contact intermediaries
     • Approach targets
     • Prelim due diligence
  3. Propose an offer
     • Start early nego
     • Make prelim valuation
     • Make offer and sign letter of intent
  4. Structure transaction
     • Prepare detailed valuation of company
     • Arrange bank financing
     • Arrange equity financing (if needed)
  5. Due Diligence
     • Prepare detailed biz plan
     • Perform due diligence
     • Verify main assumptions of biz plan
  6. Prepare legal documents
     • Prepare share purchase agreement
     • Prepare shareholder agreement
     • Close deal
  7. Manage company
     • Communicate with employees
     • Familiarise with company and stakeholders
     • Manage financial and operational dashboard
• Creating value in buyouts
  • Equity Value = Enterprise Value - Debt + Cash = (Revenues * EBITDA Margin) * multiple - net financial debt
  • Thus, levers are
    • Valuation multiple
      • Buy low, sell high
      • Negotiation for good price
      • Sell when heading right direction
    • Revenues
      • Growth strategy
    • EBITDA Margin
      • Operational effectiveness
    • Net Financial Debt
      • Minimise capital requirements of business
  • Incentives to run business, new energy from new ownership

14.1: Financing Search for ETA

Paths to ETA

1. Traditional search fund*
   • Searcher prepares Private Placement Memo (PPM)
   • Contact potential investors
   • Raise search capital from a group of 15-20
   • Salary during search is covered from fund
   • Investors have option to invest if found or roll over to next search
   • Searcher not expected to invest in company, but gets carried interest from acquisition
2. Self-funded search
   • Searcher lives off savings while on search
   • High autonomy on opportunity and investors
   • Equity stake is expected and much higher
3. Accelerator
   • Includes training of and collaboration between searchers
   • Investment capital may be provided by funds of accelerator or related investors
4. Single & Other sponsors
   • Search funded by single or multiple sponsors

14.3 Searching for a business