Thinking of selling your company or subsidiary? Some or all shares of your company?
Trying to exit from your investment?
Preparing now for a future exit?
Thinking about acquiring a company?
Raising funding for an early stage project?
Looking to drive traffic to your crowd funding page?
What is Corporate Finance?
Business owners make monetary decisions all the time, such as to raise funding for growth or to sell the business and retire or to determine the price points to sell goods and services to customers and clients.
Corporate finance deals with monetary decisions that business owners make and the tools and analysis used to make these decisions under conditions of risk. Economics is a science. We‘re not ivory tower academics, because the real world isn’t always like that. We give you the practical answers you need, without complex equations. If you want to understand economics you can always visit Wikipedia. If you want to sell your company that’s an important decision that requires planning. We can help with that. Some companies brand themselves as money machines. We know the most important corporate finance rule: "There is no such thing as a money machine." We’re here to tell you the truth and help you make the right decisions.
Money is scarce, not abundant, so business decisions are important. Business enterprises don’t make money decisions, the human beings that own those business enterprises do. Humans live in societies and are subject to social norms. That influences how humans in society behave, which affects economics. Businesses earn profit to increase wealth. If a business is small they earn profit to make a living. Corporate finance is about maximizing shareholder value.
Money is scarce, so business owners only spend the businesses’ money if the business gets something in return. That money in return must be more money than money spent to earn a profit. But profit is never certain. Risk must be compensated for, and the more risk the more compensation required. This is the risk-return spectrum. For a low risk, a low return is expected. For high risk, a high return is expected.
Business owners (like most people) don’t want to take risks and get taken advantage of. They have a risk aversion to spend money. People will generally only take a chance for return, if the risk is acceptable. If the risk is not acceptable, it could be the greatest chance for return in the world – they would not take that chance. For example: If a human in the jungle had to swim through a river, because there is abundant food (high return) on the other side of the river that human may not take that great chance, because the river is full of crocodiles and thus the risk is not acceptable. The logic of high risk / high return does only apply as long as the risk is acceptable. Avoiding risk is important for survival.
Risk aversion usually applies only to people’s own money. Risk aversion does not apply when people spend someone else’s money. That is the principal–agent problem. Large businesses may not be managed by their owners (principal), but instead by managers (agents). Those agents make decisions on behalf of the principal. Those decisions may be decisions whether or not to spend the principal’s money. Those managers could for example use their agent role for Empire Building or those managers could play (gamble) with the principal’s money and thus may be considered players in game theory or those managers could manipulate statistics or accounting.
The principal-agent problem and risk aversion is relevant to the seller and buyer relationship. Both seller and buyer are human beings and thus have risk aversion. The seller and buyer can also have a principal-agent relationship, e.g. the buyer is a venture capital investor that invests in the seller’s early stage business. Now the buyer is the principal and the seller is the agent and thus the venture capital investor has a principal-agent problem. Risk occurs for the venture capital investor if the early stage business uses the money to grow the business or buy expensive office chairs, company cars, rent an expensive office or burn the money otherwise. If that early stage business had a management team, that management team would be the agent and thus venture capital investors as the principals wish to have a professional management team as agents, because that reduces the venture capital investor’s risk. Later stage deals may be different, e.g. the buyer buys a profitable middle market company, pays the seller and the seller walks away - no principal-agent problem for the buyer. The buyer must not like that seller. However, seller and buyer of a later stage business (middle market deal) may agree about an earnout period.
That is why Interim Global Solutions provides Interim Executives for pre-acquisition and post-acquisition. See merger integration. Mergers and acquisitions (abbreviated M&A) is an aspect of corporate finance. The distinction between a "merger" and an "acquisition" has become increasingly blurred.
There may be information asymmetry between seller and buyer: insider information about the seller’s business that the buyer does not have. For this reason the buyer will want due diligence. Information asymmetry increases buyer uncertainty about return and risk. So, prior to a deal there must information exchange to resolve information asymmetry, increasing both buyer and seller comfort and reducing risk aversion, otherwise the deal won’t close. Information is exchanged between seller and buyer for example via due diligence or with a business plan. The business plan can be seen as part of the due diligence process. To exchange information, both sellers and buyers may sign a Non Disclosure Agreement prior to exchanging information in order to reduce the seller’s risk that the buyer leaks seller information to third parties. The buyer may expect the seller to have that information verified by independent third parties, such as having the seller’s accounting audited by an auditor.
Corporate finance can be divided into long-term and short-term decisions and techniques. Investors and investment opportunities may have a supply / demand relationship, determining the investment opportunity’s price, such as the share price. Money is scarce, but investment opportunities are abundant. Investment opportunities may compete for scarce money and investors must make a decision between two or more investment opportunities. Capital investment decisions are long-term choices about which investment opportunities receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. A capital investment decision about millions or billions of dollars is ideally an informed decision (see above).
When investing, the buyer must keep money spent in mind and the return must be more money than money spent to earn a profit. The buyer spends money for the investment. But prior to investment, the buyer spends money for travel, due diligence, phone calls, employee time, meetings and more. The buyer will not only look at money spent for the investment, but all the money spent including expenses to determine investment return. That means an investment itself seem worthwhile, but it may not be worthwhile based on expenses.
Sellers also have expenses prior to investment. Thoughts of investment may trigger risk aversion for seller and buyer and both may be reluctant to spend expenses prior to investment. Seller and buyer must overcome risk aversion and spend those expenses before, or there will be no deal. Seller and buyer budget for and spend expenses prior to investment even if no deal is done, the budget gets lost and thus both incur sunk costs.
Thus, corporate finance is associated with transactions in which capital is raised in order to create, develop, grow or acquire businesses. Corporate finance transactions are:
Raising seed, start-up, development or expansion capital (early stage)
Mergers, demergers, acquisitions or the sale of private companies
Mergers, demergers and takeovers of public companies, including public-to-private deals
Management buy-out, buy-in or similar of companies, divisions or subsidiaries – typically backed by private equity
Equity issues by companies, including the flotation of companies on a recognised stock exchange in order to raise capital for development and/or to restructure ownership
Raising capital via the issue of other forms of equity, debt and related securities for the refinancing and restructuring of businesses
Secondary equity issues, whether by means of private placing or further issues on a stock market
Raising debt and restructuring debt, especially when linked to the types of transactions listed above
Companies have different sizes:
Small or Startup Company
Middle Market Company
>0 - <.10Million
10Million - < 1 Billion
> 1 Billion
Companies have a life cycle. Early stage companies start as pre-revenue or start-up and may become mature stage small, middle market or big companies. Entrepreneurs serve as managers, risk-takers, leaders, and visionaries. Entrepreneurs are very important for the economy. However, risk of failure is very high in an early stage (>50%), due to many uncertainties. That risk may not be acceptable for an investor and thus the logic of high risk/high return may not apply (see above). That is why unfortunately about only 1 out of 100 early stage deals can raise funding. Since the likelihood of raising funding for early stage clients is only 1%, Interim Global Solutions cannot work for early-stage client’s success on a fee basis, because the likelihood to earn that success fee is only 1% as well. That is why we charge a subscription fee for early-stage clients.
Interim Global Solutions is geared for private, not public transactions, such as IPO, etc. Interim Global Solutions is geared for transactions involving businesses, not transactions involving commodities. In a world of globalization, transactions can be national or cross-border, such as between Europe and the USA.
We do small company transactions too, making our role comparable to that of a business broker. The market served by business brokers generally involves the sale of companies with transaction values less than $10 M. Interim Global Solutions may also work for early stage and pre-revenue companies. However, we do transactions between $10 M and $100 M in the middle market as well. The majority of deals are done in the middle market. We assist buyers and sellers of privately held businesses in the buying and selling process, including advertising for sale with or without identity disclosure.
How does advertising work?
In advertising theory there are six steps a consumer or a business buyer moves through when making a purchase:
A business can be advertised for sale with or without disclosing its identity (see above). Not disclosing identity makes it harder (if not impossible) to create awareness and achieve a purchase. Identity disclosure is therefore recommended.
So, why do brokers often advertise deals without disclosing identity, when it makes awareness almost impossible? There are three forms of broker’s compensation; hourly, retainer, and success fee (commission upon a closing). Interim Global Solutions may charge a subscription fee. Brokers that work based on a success fee need to make sure that they are not bypassed and thus cannot disclose the business identity when advertising it. Bypassing is when seller and buyer do a deal behind the broker’s back to make sure that they do not need to pay the broker a success fee. So, for a broker it is mutually exclusive to advertise a business for sale and disclosing its identity and at the same time be compensated with a success fee—except that broker gets exclusivity for that deal. However, exclusivity restricts the client’s options to advertise otherwise, for example, to do crowd funding or hire a second broker—thus it is not useful for the client.
not disclose its identity
possible, but not useful (1)
possible, may be useful (2)
disclose its identity without having exclusivity
possible, may be useful (3)
not possible (4)
disclose its identity having exclusivity
possible, but not useful (5)
possible, but not useful (6)
So, it seems that only option (2) and (3) are possible and may be useful for both broker and client.
Advertising occurs by email using a database (database marketing), because email is cost-effective and is below-the-line. Above-the-line may make no sense. We have a global investor database with about 200,000 records. The database is a sample of the global investment community (population). However, the size is so large that it can be considered to be the global investment community. In that database there are for example:
We have investor records in our database from all over the globe. Many investors do cross-border transactions. This is an advantage for clients, increasing client exposure to investors significantly. For clients in developing countries this is often the way to go, due to the need for foreign direct investments. Buyers consider country risk when making informed investment decisions so sellers need to consider that too (please see Research & Advisory).
We regularly update the database every week throughout the year, to keep it current. There are several reasons that we update the database:
Private equity companies re-brand (and the domain changes),
Private equity companies hire new employees (with a new email address),
Employees of private equity companies ask to include a colleague in the database,
New private equity companies are founded (with a new email address),
Private equity companies are bought and change their name and domain
We constantly meet new investors at events
And many more!
We do an email campaign to the investor database every month. We use state-of-the-art software, specifically Infusionsoft. The email campaign is automated and personalized to extract the best response rate. Each individual receives one email and dedicated for that individual with his/her name. We produce and send thousands of personalized and dedicated emails every day.
To enhance awareness the deal is put with an email on the investor’s Outlook or iPhone right in front of the investor. We have long-standing relationships and a good reputation with investors (e.g. our Private Equity Forum), making it likely that they will read e-mails from us. Our research assures that we send e-mails to the decision-makers at companies.
We have 52 slots for email campaigns to the investor database available per year. Email frequency can be weekly. Not all slots are available for dedicated email campaigns because 12 slots annually are used for the regular monthly email campaign. So, the number of slots for dedicated email campaigns is limited.
Interim Global Solutions is a consultant and can have buy side clients and sell side clients. However, Interim Global Solutions cannot work for seller and buyer at the same time for reasons of conflict of interest. Interim Global Solutions does not make and cannot alter economical rules such as a principal-agent problem. Interim Global Solutions as a consultant may advise clients on different aspects to develop tactics and strategies to deal with those aspects (see Research & Advisory). Aspects may be pro or con. Clients in developing countries have specific needs. Early stage clients may need to consider different aspects than later stage clients. Buyers may need to consider different aspects than sellers. We help you to consider all of your concerns to make informed decisions.