Appoint advisers

A corporate finance adviser can guide management through the process and use his contacts with venture capital funds.

Preparation of business plan and financial model

Management need to prepare a business plan setting out the background to the business and their plans for its development. They will also need to prepare a financial model setting out the historic results and the profits and cash flow which they project will arise from their plan and the impact on the balance sheet. A high-impact two/three page summary and presentation also need to be prepared.

Structuring the financing plan

A key task is to prepare a structure for the proposed financing. This will set out the nature and amount of the financing the team is seeking.

Non-Disclosure Agreement (NDA)

The BVCA has prepared standard NDAs and potential financial backers are accustomed to signing these.

Contacting potential financial backers

The British Venture Capital Association ("BVCA") lists over 70 firms which supply venture capital. The management team and their advisers have to decide which firms are most likely to be interested in the prospective transaction. The choice is usually driven by the size of deal, the industrial sector which the business is in, and for smaller deals, the geographical location of the business. A list of 10-20 prospective backers is established and contact made by phone to establish interest in principle in the proposed transaction. The Executive Summary and NDA are sent to potential backers.

Business plan distributed

If the backers are interested in the proposal, they will be sent the business plan upon return of the signed NDA.

Road show to interested backers

Following the responses to the business plan, the initial list is usually whittled down to 3-5 potential backers. They will be visited during the course of a week to make the presentation. These presentations are usually followed by further meetings with one or two of the backers before they decide whether to finance the deal.

Term sheets from potential backers

The backers will set out their offers of finance and the associated terms and conditions in a formal term sheet. Their offers are normally subject to further investigation and verification ( "due diligence") and to the approval of their investment committees/credit committees which they will obtain later in the process.

Negotiate term sheets and select preferred backer

Management and their advisers will negotiate the details of the term sheet and select the preferred backer. Management should seek to button down all the key terms at this stage as the backer will be in a stronger negotiating position when the due diligence is completed.

Exclusivity period

The preferred backer is granted an exclusivity period of normally 6-10 weeks during which time the management agree not to negotiate with any other backers. Financial backers require this arrangement as they incur external costs for accountants and lawyers and don't wish to run the risk of the deal going elsewhere and losing the money they have spent.

Due diligence

The due diligence involves investigations by lawyers, accountants, market consultants and other experts. The objective of their investigations is to throw up any previously unrevealed issues which could have an impact on the transaction and to confirm the information which has been disclosed. One element of this work is a review of the financial model by the accountants and will involve them running a number of "scenarios" by employing different key assumptions.

Confirmation/renegotiation of offer

The various experts issue reports of their findings. If the financiers are happy with the findings they will normally confirm their offers. If the financiers are not happy with the findings, they may wish to renegotiate the valuation or other terms. If the findings are particularly poor, the financiers may withdraw their offers.

Legal documentation

During the exclusivity period the vendor and the management team's backers will start to put together the legal documents. These include a new set of articles, the equity subscription agreement including warranties and indemnities from management and management's service agreements.

Conditions precedent

The term sheets will contain a number of conditions which must be satisfied before the facilities can be drawn down. In addition to being satisfied with the due diligence and the legal documentation, these will include key man insurance for the principal members of the management team, adequate company insurance and property valuations, if applicable.

Management's service contracts

Each of the key members of the management team will be expected to enter into a service agreement. In addition to the customary terms in a service agreement, there are provisions known as good leaver/bad leaver provisions. The consequence of being a bad leaver is that the manager loses the upside on his shares if he is fired but he or his estate will have the benefit of some upside if he is considered a good leaver e.g. if he dies or has to retire due to illness.

Management's equity investment

If they have not already invested in the business, management will have the opportunity to acquire a shareholding on advantageous terms compared to the other shareholders. The cost of the investment should be significant for each individual so that he does not walk away if things go a bit wrong. However, investors do not normally wish to see the management completely impoverished if the venture fails.

Completion of the acquisition and financing

When all the documents have been agreed, the agreements are signed and the funds are paid over.