Are You Mispricing Your Equity?

You want the Goldilocks equity offering...
The one consistent question I get from my customers that have purchased a private placement template is "How much in equity warrants will I need to give up?"Offer up too little and you will have a difficult time attracting the capital you are seeking. Offer too much and you will have left money on the table – maybe hundreds of thousands, or even millions. You want the equity offering that's just right - the Goldilocks offering.Think of it this way. If at the end of five years the equity of your business is worth $2,000,000, every 1% of equity value you allocate to your investors in warrants means $20,000 less to you.

Yes, that can add up to be serious money.
And while you should make sure that your investors have an appropriate expected return for their investment, you need to have a rationale way of determining what that is.

So how do you do that?
The math to determine the equity give-up is not difficult. And while you may be told that it’s complicated and mysterious, it’s not.

You can do it on the back of an envelope
There is a simple, systematic way to quickly determine how much equity your deal will require. In fact there are really only six steps to get to a reasonable number:

  1. Determine a base case forecast for the business.
  2. Determine the structure and terms (except for the actual warrant position) of the preferred security you are issuing (dividend rate, whether current pay or accrued, the term).
  3. Determine the expected enterprise value at the end of the investment horizon – (EBITDA times the exit multiple).
  4. Determine the equity value at the end of the investment horizon (the enterprise value less debt, less preferred, plus cash).
  5. Determine the dollar amount required that results in the targeted IRR (if your investors require a 30% IRR, how much will then need to receive, and when in relation to their investment).
  6. Divide the result you get in step 5 above by the result in step 4. That quotient results in the percent of equity in warrants you will need to make available for your investors.

So, it’s not mysterious.

You can do this calculation by hand...

Or, you can use TransCapital Pro’s “Back-of-the-Envelope Equity Pricing Model”.
This model was built to help transaction sponsors quickly, easily and systematically determine the economics of an equity raise.

CLICK HERE to see a demonstration.

After you plug in your assumptions, play with different scenarios:

  • Change the dividend rate.
  • Switch the dividend cash-pay on or off.
  • See what different exit multiples does for your returns.
  • Adjust the percent of equity you will allocate to your new security.

Instantaneously you will see:

  • The returns to the preferred shareholders.
  • The return to your common investment.
  • The blended return to your common and preferred (yes, you'll be in both).

But maybe you're wondering...

  • If it's too complicated
  • If you'll be able to run the model
  • Why you need a model if you can do it by hand
  • If you have enough finance experienced

You may be wondering if it’s too complicated.
As you can see in the video, the interface for this model is clean and simple. Including a brief instructions tab, there are only four tabs: Instructions; Assumptions, EBITDA, Debt & Cash; and Exit Assumptions and IRRs.

The assumptions for the model are items that you should already have a sense of:

  • The amount of debt financing for your transaction.
  • An estimate of the transaction costs.
  • The amount that you are investing into the transaction.
  • A cash flow forecast for the transaction. While the inputs ask for revenue, gross profit and EBITDA, you only really need to concern yourself with the EBITDA.
  • An estimate of the outstanding debt and unrestricted cash (you can just assume the cash is $0) for the year(s) you are determining the IRR for.
  • Dividend rate and whether you are paying dividends in cash or accruing the dividends.
  • The anticipated exit multiple.

The model does all the work.

You may wonder if you will be able to run the model.
If you have Microsoft Excel, you can run the model. Once it opens, you will input your data in the cells marked in BLUE. All the other cells are locked, so there’s nothing you can do to blow up the model.

You may be thinking “I can just do this by hand, I don’t need a model”.
You’re right. As I described above, you can do it by hand; the math is easy. But it does take a little time. And, if you want to run multiple scenarios, then how many pages of legal pads will you need?

You really have more important things to do than penciling out – literally – different IRR scenarios…

It comes down to – what is your time worth?

You may be wondering if you have enough finance or corporate finance experience.
Your level of corporate finance knowledge or experience does not matter. If you are even thinking about raising capital for a business venture, whatever it is, then you should know enough to get value out of this model.

And, if you have trouble evaluating and interpreting the data from the model, I’m just a phone call away. If you have any questions, or just need an impartial sounding board, I’m available – one thing I love is talking deals.

So, who is this model for?
I’ve used this method hundreds of times to help clients, customers, friends, and neighbors quickly analyze equity investment returns. And not just transaction sponsors, but investors as well.

This model is for:

  • Business owners seeking to raise equity to grow their business.
  • Business owners seeking to make a complementary acquisition.
  • Individuals raising capital to acquire a business.
  • Investment bankers looking for an alternative to huge, complicated multi-sheet spreadsheets, when they just need a quick reality check on a deal.
  • Bankers to make sure that the equity of a deal works as they underwrite a deal (yes, it’s really not enough to just look at your strip of the capital structure).
  • Business brokers looking to sell a business – use this model to quickly determine if your client has unrealistic price expectations.
  • Business brokers helping buyers come up with the money to close a deal.
  • Accountants looking to help their clients figure out the economics of a transaction.
  • Private investors that want to get a quick read on a deal backwards engineer the warrant position to determine if the assumptions make sense.

You get the point...

Money back guarantee
Like all of our products, the Back-of-the-Envelope Private Equity Pricing Model comes with a 30 day, No Questions Asked, Money-Back Guarantee. If for any reason you are not happy with this product, simply send me an email within 30 days of your purchase and I’ll refund your purchase price.

Why us?
First because I’m a big fan of simple and systematic. While I’m not sure there is another product on the market that will let you quickly and easily answer the question “How much equity will this cost me?”, if there is, I bet it’s complicated. I’ve seen enough financial models to know that they can be very cumbersome to use – that’s after you spend a couple of hours figuring out all of its idiosyncrasies.

Second, because this is what we do – we help business owners and transaction sponsors keep more of the money they raise from their capital transactions. While using one of our templates once you can end up with $19,703 more in your pocket - how much more will you end up with by getting the equity pricing right?

Finally, I won’t leave you hanging. I’ve literally spent dozens of hours on the phone with clients, customers and prospective clients answering questions and talking through transactions. If you have any questions about this product, or your transaction, I’m a phone call away.

Need more information?
Watch the demonstration.

Ready to order?
Go to our Order Page.

If you have any other questions, please email or call me and let me know how I can help.

All the best,
Nick