RESOURCES
Work Plan
The following work plan relates primarily to an equity recapitalization but is also relevant to debt-related recapitalizations.
It covers various issues that owners and their recapitalization team should analyze when trying to price, structure and implement a successful recapitalization.
Valuation of the Shares to Be Sold
There are many ways to value a company, and a number of them should be used to determine the purchase price, including:
- Public company comparable valuation
- Comparable transaction valuation
- Discounted cash flow valuation
- Financial buyer valuation
Financial Modeling
If a transaction requires third party financing to purchase the shares of an outgoing investor, the remaining owners and recapitalization team will need to develop a detailed financial model for potential lenders and investors. This model should show the historical performance, the recapitalization transaction and the projected performance of the company. The model should include a detailed income statement, balance sheet, cash flow statement, valuation, and set of assumptions.
The financial model will guide you in determining a fair price for the shares and will outline the company's debt capacity. It will also show the effects of different capital structures and how much debt is prudent for the company to assume in order to finance the transaction under different operating scenarios.
Raising Financing
The recapitalization team should assist management in raising financing by making presentations to sources of senior debt, subordinated debt, and equity, and assisting in negotiations with financial institutions over the terms of the financing. This occurs concurrently with the due diligence process.
Intercreditor Agreements
If debt financing is being raised and the company has an existing lender, there may be intercreditor issues. For example, if the company has a senior lender, but requires mezzanine financing to purchase the shares of the outgoing owner, the two lenders will have to become comfortable with the security interest of one another's loans. Although this is really an issue between the two debt providers, and not the borrower, such negotiations can be contentious and may delay the transaction.
Purchase and Sale Agreement
The acquisition team should assist the remaining owners with negotiating the legal document that establishes the terms of the purchase and sale of the shares.
Coordination
Because there are a number of players in a recapitalization, it is important to designate a leader to orchestrate the efforts of the financial institutions, partners or investors, valuation firms, legal counsels to the lenders, partners and investors, and any other professional advisers who may be required for the transaction. If valuing the shares is not contentious and third party financing is either not required or easy to source, the chairman of the board of directors may lead the transaction. However, if the transaction is financially complex and has valuation, tax and financing issues, an investment banker or an attorney, who is well versed in recapitalization, is a more likely choice.