Ready to begin negotiating with investors? Here are some things to keep in mind according to Transactional Group lawyer Joel Nied. To learn more call and schedule a consultation today.
#1 Get Investors Involved Early…..But Not Too Early
The earlier in the process the independent sponsor initiates investment discussions, the better. Waiting until the earnest money goes hard will make the investors think they have the upper hand (which they will), resulting in unfavorable terms for the independent sponsor. Getting the investors involved too early, however, could also lead the investor to question whether the independent sponsor is bringing any value to the deal other than the identity of the target. In that case, the investor may not be inclined to pay a management or consulting fee. Ideally, the independent sponsor should get the investors involved after the independent sponsor has executed the purchase agreement for the asset or business.
#2 Try To Get Investors to Share In The Pre-Closing Expenses
Sometimes deals don’t close. But usually a lot of money is spent moving the deals toward closing: attorney’s fees, earnest money, travel expenses, etc. If an investor signs on to the prospective profits if the deal closes, get them to agree to pay a portion of the pre-closing expenses if the deal doesn’t close.
#3 Make Sure Your Carried Interest is Actually Carried Interest
Independent sponsors generally think they will get a percentage of the equity of the acquirer. This “carried interest” has a beneficial tax treatment for the independent sponsor. Some investors, however, like to provide a “synthetic carried interest” – effectively it’s a bonus that mimics the characteristics of a carried interest, but is taxed at the significantly higher ordinary income tax rate. Push for a true carried interest.
#4 Who Is Going To Sign The Guarantees?
If the sources of funds for the acquisition includes one or more conventional bank loans, the bank will most likely want someone to sign a guaranty. If the independent sponsor is taking a relatively small role in the transaction post-closing, especially if the investors have control over the finances, the independent sponsor should be wary of signing a guaranty.
#5 Will There Be Any Cashflow
Independent sponsors and their investors may have different views on distributions of profits from operations versus profits from the sale of the investment. Independent sponsors usually want to distribute the cashflow. Investors, however, may be structured so that they are prohibited, or discouraged, from receiving operating profits from an investment. Make sure you understand the investors’ goals and constraints.
#6 Could You Be An Unlicensed Broker-Dealer?
Some investors simply want the independent sponsor to bring them the deal and walk away. The investors will close the transaction and handle everything post-closing. In return, the investors will pay the independent sponsor a fee. If the acquisition of the target business is in the form of a stock or LLC membership interest purchase, the independent sponsor’s role could be deemed to be a broker of securities. If the independent sponsor is not properly licensed, the transaction could violate state and federal securities laws.