Private Placement Memorandum

Get Professional With A Private Placement Memorandum Template

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Private placements are not just for multi-million dollar deals. Even if you are seeking raise $100,000 to acquire a franchise or a piece of investment real estate, you are still required to present prospective investors with a private placement memorandum, or PPM. The challenge is that PPMs can be expensive to have drafted. A good attorney will cost you $20,000 or more. A PPM consultant will cost $5,000 to $15,000 (and you should still have an attorney to review it). Unfortunately, these costs are either i) out of reach for many businesses and entrepreneurs, or ii) recognized as sunk money if their deal doesn’t close.

A great alternative for many business owners and entrepreneurs is to purchase a Private Placement Memorandum Template. A well-formulated private placement template will help guide the issuer through the process from the term sheet through the business description. Specifically, the template should help the issuer craft the memorandum so that the prospective investor can make an intelligent Go / No-Go decision. Of course the template can only go so far; the issuer must be totally transparent in presenting the business and opportunity – warts and all. There should be no commission of false statements or omission of facts that, had they been presented, would lead the reader to a different conclusion.

Aside from being required to be legally compliant with securities laws, a well-written PPM will present you and your company in a professional manner. Your private placement template should include the same things you would want to see if you were sitting in the seat of the prospective investor. Some of these sections include investor disclosures, a term sheet, risk section, business description, transaction description, capitalization, sources and uses of funds, financial presentation (including discussion and analysis), description of the securities being issued and a tax discussion.

So if you want to save some money and mitigate your risk of ending up with huge busted deal expenses, consider using a private placement memorandum template. Just make sure that its flexible enough to accommodate your transaction and that the template itself is set up to guide you through each section. Finally, regardless of where you purchase your PPM template, make sure that after you get your PPM drafted, have your attorney review it and provide comments.

Raising Capital For Your Business

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Whether your business is a start-up or a mature business, one of the most critical activities you’ll face is raising capital. One of the best, and often the most overlooked sources of capital are private investors. And while often times money is raised through friends and family, my view is to stick with accredited investors that are in the deal business each and every day. If you do tap friends and family for capital, make sure that the relationship  can handle a total loss scenario.

An intergal part of the capital raising process is your “prospectus,” which is different depending on where you go for your capital needs. If you are going to a bank, or a non-bank lender (such as an SBIC), you’ll want to have a crisp executive summary that provides the lender with information about your business and the use of funds. Some points that the executive summary should cover include a short history of the business, overview of the transaction (working capital, purchase new equipment, refinance existing debt, buyout of a partner), what products you sell, who your customers are (if applicable, think top ten customers and the last three years of sales for these customers), who your suppliers are (top five or ten suppliers and amounts purchased over the past three years), manufacturing process (as applicable), industry and competition (a SWOT analysis), sources and uses of funds, capital structured (pre and post financing), and summary of financial performance with applicable discussion and analysis.

If, on the other hand you are seeking to raise some type of junior capital, such as equity or subordinated debt, from private investors, you will need to have a private placement memorandum.

Think of the private placement memorandum as the executive summary on steroids. The private placement memorandum, or PPM, provides your prospective investors with the information that is needed to assess the trade-off between risk and return. You will need to articulate what the “deal” is; i.e. what type of security you are issuing, the terms, restrictions and covenants of the security. The PPM should also articulate the risks of the transaction, which includes risks inherent in the business, industry, potential conflicts of interest, risks specific to the security being issued, and corporate structure. The key to this risk section is to not sugar coat it and to not try to mitigate the risks in this section. Put yourself in the shoes of you prospective investor – what information would you wan to know?

Raising capital is not easy, but can be rewarding, aside from actually raising the money. Going through this process will require to think about and talk about your business in ways that you might not have had to in the past. And while you may think you have the best business or business idea (in the case of a start-up) in the world, when exposed to the the light of seeking capital, you will begin to see and think about your business in news ways.

Raising capital, particularly private capital, can take a long time. Depending on what type of relationships you have and how much initial work you do, expect to take six months or more to complete your offering. Even closing on a simple bank financing can take six to eight weeks from start to finish.

Raising capital can also be expensive. In the case of a traditional bank financing, your costs can often be rolled into your financing. Likewise with private placements, except for any placement fees you may pay, your costs can be paid or recouped out of the proceeds of your closing. The biggest risk, however, is the risk of bused deal expenses – your upfront expenses that get paid regardless of whether your transaction closes or not. As an example, your private placement memorandum can cost as much as $20,000 when prepared by an attorney, and bank financing expenses can include commitment fees, appraisal fees, and environmental assessment fees.

At the end of the day, raising capital is something that can be done. Like a lot of things in life, it takes know-how, persistence, and a little luck.

Do You Need An Attoney To Write A Private Placement Memorandum?

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A question posed by one of my visitors was whether you needed an attorney to write a Private Placement Memorandum. While the question was in the context of someone who wanted to draft a PPM for a client, the answer has broader applications. The short answer is yes and no.

First the ‘no.’ Your PPM has several sections, some of which are boilerplate and some of which require information that is specific to your business, transaction and issuance. The boilerplate sections include the investor legends, the description of the securities and tax discussions, some of which may need to be tweaked depending on your situation, but generally they are boilerplate sections.

Where you will spend most of your drafting time will be the term sheet, risk section and business discussion section. These are aspects of your offering that your attorney can help with by providing input around the edges, but generally will not be drafting for you. Lets look at each of these sections.

TERM SHEET – The term sheet is that section of your PPM that describes the security you are offering to your prospective investors. The main section of the term sheet will describe:

  • the type of security you are offering (debt or equity, and all of the flavors in between);
  • the price you are willing to pay for the capital you are raising (straight interest or dividends, warrants, success fee; convertible provisions, any preferred return provisions);
  • how you will be paying the return to investors (PIK, cash pay);
  • how the issuance ranks relative to other capital in the business (or fund); and
  • affirmative and negative covenants.

You’ll want to spend time on this section first to make sure you have the right capital structure in place and, two to make sure you price the issuance properly. Price it too cheaply and you won’t clear the market (and run the risk of tainting your offering); price it too dear and you’ll leave money on the table.

Where your attorney can help with the term sheet is to make sure that you capture and think about all of the nuances of whatever type of security you are seeking to issue. For example, if you are raising subordinated debt, you will need to think about intercreditor issues with the senior lenders and what type of standstill provisions need to be in place. A good securities attorney can draw on years of experience across a variety of transactions, deal structures and types of offerings.

As a metric on how long this might take you, I spent about an hour drafting a term sheet for a client earlier this year. This was after we spent about an hour talking about what made sense and I spent some time on my own noodling different scenarios. But the drafting part took about an hour, and I’m comfortable and experienced with writing term sheets.

RISK SECTION – The Risk Section is where you’ll discuss all of the reasons why a prospective investor shouldn’t invest in your offering. It important to be very transparent in this section and not hold anything back. You’ll want to present and discuss all of the risks you would want to know about if you were on the other side of the table. You will also want to resist the temptation to state a risk and then mitigate it, a natural reaction.

The Risk Section is where your attorney can add a lot of value. It is usually just a few word changes that make the discussion more transparent, and by adding certain risks that are related to legal/corporate/security issues, rather than business issues.

BUSINESS DISCUSSION – The business discussion section is where you discuss your business and strategy, as well as discussion why the business is seeking to raise capital. Some of the points you will want to discuss include:

  • history of the company
  • what you sell
  • who your customers are
  • why they buy from you
  • your suppliers
  • manufacturing process (if applicable)
  • capitalization
  • sources and uses of funds
  • historical financial performance with discussion and analysis
  • projected financial performance with discussion and analysis

So at the expense of sounding wishy-washy, the answer to whether you need an attorney to draft a private placement memorandum is both yes and no. ‘No’ in that there is so much of the PPM that only you will be able to write. ‘Yes’ in that your attorney can add value to the process, but after you have the bulk of the PPM written. And, my strong suggestion to all of my clients is to always have an SEC attorney review and comment on your private placement memorandum before you start talking to prospective investors.

Raise Capital With Private Placement Memorandum

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Use a Private Placement Memorandum Template from TransCapital Pro to raise capital for your business – whether its $100,000 or $10,000,000. You can raise capital for your business, private equity fund, or real estate transactions. Our templates are valid in all 50 states and are easy to navigate to  customize for your purpose.

Writing your own private placement is not as daunting an assignment as it sounds. A good template will guide you through all of the various sections. And, at the end of the day, you are essentially articulating your business plan to your prospective investors – and who knows your business better than you.

One of the critical sections of the private placement is the Risk Section. Here you will want to be totally transparent. I advise my clients that they should provide the information that they would want to know if the roles were reversed. You should never commit an intentional lie, or a lie of omission.

The other advice I give clients who choose to write their own private placement memorandum is to not sell. Just stick to the facts of the business and of the transaction. If you need a sale document, prepare a power point presentation.

Finally, make sure you get your attorney to review your PPM. Where I’ve found attorneys to add value is by tweaking the language in the Risk Section. I think its human nature to want to mitigate the risk your are stating (because you want to get your deal funded). But this goes against the grain of what the PPM is all about, and your attorney will take an objective view of this section and make sure its “just the facts.”

Private Placement Memorandum Templates for private equity and debt offerings from TransCapital Pro.

Private Placement Memorandums Help Companies Raise Captial

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A Private Placement Memorandum is required of companies and hedge funds to help them raise capital. The private placement memorandum’s primary purpose is to disclose to the prospective investors all or the necessary information about the company and the transaction.  Years ago business owners were beholden to law firms for the drafting of a private placement memorandum. Today, the business owners have other sources to which they can go to for the drafting of a private placement memorandum.

Reg D is an exemption under securities law that allows for companies to raise capital from private investors; think of it like a private IPO. Companies can raise from $100,000 to $10 million of debt, equity, or preferred stock.

Information about your company, and the transaction at hand is all communicated through the private placement memorandum. This document helps prospective investors understand the nature of your business, as well as the risk involved. There are several web-based firms that provide Private Placement Memorandum Templates to help companies navigate the documentation process.

A reg d offering, or private placement can be run by a company of any size, from a start-up to a mature $100 million revenue business. These offerings can also be done by a C-Corp, S-Corp, or LLC (note that there are some restrictions for the classes of securities that an S-corp can issue).

Companies such as TransCapital Pro help business owners save money and hedge against busted deal costs by offering private placement memorandum templates for a fraction of the cost of an attorney-written document. If you choose to go the route of writing your own private placement memorandum o your own, it is a great idea to have your attorney review and comment on your document before you hit the street.

Private Placement Memorandum Templates for reg d private offerings, private equity funds and real estate funds.

Using Private Placements For Reg D Capital Raising

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Private placements are a great alternative for businesses to raise capital. Permitted under Regulation D, also known as Reg D, companies can seek capital from individual investors. These individual investors will typically need to meet the accredited investor requirements of Reg D.

Private placements can be used to raise debt or equity, and can be used for any number of purposes. Businesses have used private placements to raise capital for growth initiatives, acquisitions, and new business ventures.

The challenge for businesses is the traditional initial cost to prepare a private placement memorandum. These costs are typically $20,000 and can run as high as $40,000. The concern many businesses have is that these costs are incurred before they even begin the actual process of pitching prospective investors. The good news is that with the right template, businesses can write their own private placement memorandum and then have their attorney review for significant upfront cost savings.

See all of our Private Placement Templates

Private Placement Tutorial – Warrant Pricing

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Most people find that writing their private placement is fairly easy. Where they get hung up is trying to figure out how mush equity to offer their prospective investors.

Well, pricing your equity is easier than you think, because it only takes six simple steps.

Watch the video below:

Easy to do by hand.

But if you want to quickly run through multiple of scenarios, take a look at our Equity Pricing Model.

Writing The Risk Section Of Your Private Placement

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When writing your Private Placement, the risk section is one of critical parts. And given the mindset of seeking investors to invest in your transaction, there is some incongruity in that with the risk section you are telling your prospective investors all the reason they should not invest in your deal.

The reason the risk section is so important for your private placement is two-fold. First is to warn investors of the risk of inverting in the deal. The securities laws are in place to provide protection for the investor. Second, is to protect the issuer and you, the sponsor (the person putting the deal together), from potential claims that material risks were not disclosed.

There are a couple of things to keep in mind as you write the risk section of your private placement. First and foremost is to be totally transparent. Be factual and truthful in articulating the risks of your transaction. Look beyond your role as the one seeking investment capital and put yourself in the shoes of the investor; what would you want to know.

Second, present the risks of the transaction as they relate specifically to your deal. Avoid just stating general risks that would apply to any and all investments. For example, instead of just stating something like “…our business is affected by the economy”, your might instead state that “…our sales are dependent on discretionary income, which would be negatively affected by a slowing economy”. See the difference?

Third, just state the risk. Do not soften or try to mitigate the risk you are stating with commentary on why the risk may not happen. By doing so you are voiding the whole purpose of the risk section.

Finally I want to share a simple method on how to think through the risks in your transaction. Take your income statement and starting with revenue, think about all the things that could negatively affect each line item. For example looking at revenue would focus you on a major customer and the effect the loss of that customer would have on the business. Similarly, looking at the costs of good sold would focus you on the risk of having a single manufacturing facility and the effect that losing your facility would have on the business.

Your private placement is a document that is meant to help prospective investors make prudent decisions. Your role as an honest sponsor is to layout the facts and present your transaction, warts and all, as transparently as possible.

Capital Structure

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Two weeks ago I started a series on an approach to evaluating private transactions. In the first part I set forth the idea that there are three pillars to effectively evaluating a transaction – capital structure, ownership and company. The evaluation of these three pillars helps frame two of the cornerstones of your transaction – the size of the commitment and the required return.

In this second part of the series we’ll look at the first of the three pillars – capital structure. Capital structure refers to how a business finances its operations and growth. At its simplest level capital structure consists of debt and equity.

The components of capital structure that I’ll discuss below are: Leverage; Loan-to-Value; Liquidity; Inter-Creditor Relationships; and Bankruptcy Considerations.

Leverage – Leverage in this context refers to debt to cash flow, with cash typically defined as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). If you are evaluating a business that has significant capital expenditures, (“Capx”), you will want to consider using free cash flow (“FCF”) in your leverage calculation. FCF is simply EBITDA less normalized Capx. If you find that the company’s depreciation is a good proxy for Capx, then you can use EBIT or EBITA.

A company’s Leverage is the back-of-the-envelope metric, or shorthand, used by corporate finance professionals to measure the debt load of a company. Additionally, it is a metric that speaks to the general mood of lenders; i.e. higher average leverage ratios mean that lenders are aggressively pursuing lending opportunities while lower average multiples reflect cautiousness on the part of lenders.

Leverage in a transaction will need to be assessed for both senior debt as well as any junior debt (also referred to as mezzanine or subordinated debt). The leverage multiple is expressed as a cumulative number, so that if senior debt is “3.0x cash flow” and there is half again as much debt from a junior facility, the total leverage would be expressed as 4.5x cash flow.

For example, if a company had $2.0 million of cash flow, $5.0 million of senior bank debt and $1.0 million of junior debt (which can either be “institutional” sub-debt or seller debt). The leverage ratios would be 2.5x senior and 3.0x total debt.

The “right” amount of leverage is more art than science. It needs to be weighed against credit statistics such as interest coverage and fixed charge coverage, the company’s business model, and the loan-to-value, or LTV.

Loan-to-Value – The leverage ratio cannot be thought about in a vacuum; it needs to be considered against the enterprise value of the business. When I was a lender I would regularly receive queries about what multiple I would lend. The only valid response would be “what’s the business” and “what’s the deal”. There were times someone would be looking for 3x senior financing on a business they were acquiring for 3x or 3.5x cash flow. So from a purely multiple standpoint, 3x cash flow sounded reasonable, but when considered in the context of LTV, the request clearly consisted of some measure of equity risk.

The LTV analysis is easier when considering an acquisition transaction – where there is a money vote on the valuation. And even here, I’d submit that you’ll want to validate the valuation by running your own return calculations and looking at comps (to the extent available). In the case of a refinance or recap, it’s a combination of judgment, experience, available comps and some math. All you’re looking for is some reasonable range on the enterprise value to put the transaction into proper context.

Liquidity – Liquidity refers to the short-term capital a business requires to finance its daily operations. A company’s liquidity is generated from 1) profitability; 2) working capital; and 3) lines of credit. Reviewing a company’s statement of cash flows is a great place to start when assessing cash flow and liquidity. If you’re not familiar with how to think about the statement of cash flows (and, you’re not alone), think of it as what ties the income statement and balance sheet together.

Working capital analysis involves looking at the business’s cash cycle and whether cash is being generated or consumed by the company’s working capital. One of the simplest fixes I’ve seen from buyout professionals has been fixing a company’s working capital. In more instances than I can recount, significant buyout debt had been repaid from cash generated from better working capital management.

Finally, with respect to any line of credit, make sure that it is sufficient to meet cash flow demands. Look at advance rates as well as excess availability.

Inter-creditor relationships – Inter-creditor relationships refers to the agreement(s) between different classes of debt holders. The most common would be the inter-creditor agreement between a senior lender and a subordinated lender. These agreements spell out the rights and remedies of each class of lender and typically only comes into play when there is a default or an event of default. The inter-creditor agreement will spell out what kind of blockage rights one class of lender will have over another. And while this topic may be of more interest to the providers of debt capital to a business, it is also important to understand for the business owner or transaction sponsor.

Bankruptcy Considerations – Bankruptcy considerations address the question of what happens in the event the company files for bankruptcy protection. From the perspective of a junior lender – which can either be a third party lender or a seller note – the junior lender will want to be secured. In the event of a bankruptcy, if the junior lender is unsecured, he will fall into the same class as all other unsecured claims. If however the junior lender is secured, he will have a priority claim over the unsecured debtors to any proceeds from a liquidation. The other implication here is that the topic above – Inter-creditor Relationship – comes into play. If the junior lender has a second lien on the company’s assets, the senior lender will want to make sure that they can control the security so that they protect their priority claims on the secured assets.

This covers the first pillar for effectively evaluating a transaction. While each of the areas discussed can be taken deeper, the purpose here is to give you a framework with which to think about a transaction. The next article in this series will address the second pillar of evaluating a transaction – Ownership.

Three Pillars For Evaluating A Transaction

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I recently had the occasion to think about and articulate how to approach private debt transactions. When you’ve done something for a long time it becomes second nature. So when I sat down to deconstruct how I go about evaluating a transaction, it became an interesting exercise.

This will be the first of a series of articles that will present a simple and efficient way to think about how to approach a transaction. While written from the perspective of the investor/lender, this series will have application for any type of investor, as well as for those seeking to raise capital.

When you think about making a private debt investment, or really any type of private investment, it calls for the assessment of a number of aspects of the transaction. Having a systematic approach will help you touch on the critical aspects of the company.

The approach I will describe has three essential pillars. Sitting on top of the pillars is the investment decision (if you decide to proceed) of commitment size and required IRR. For most investors the size of the investment is tied to the required IRR. I’d submit that there is an inverse relationship between the size of the investment and the IRR; i.e. the higher the required IRR the lower the investment commitment. Of course there are those that like swinging for the fences. For those investors, there might be a closer, or positive, correlation to the required IRR and the size of the investment.

Each of the three pillars described below has several components to it. Listing and describing these pillars and their respective components is straight forward. It’s the analysis and evaluation of each pillar and its components where the rubber meets the road. It’s what you do with your evaluation that’s important.

The three pillars that this series will discuss are:

  1. Capital Structure;
  2. Ownership;
  3. Company.

Below is a simple list of the various components for each of these pillars. Subsequent articles in this series will expand the various components listed here.

Capital Structure When thinking about the Capital Structure of a company, consider its leverage (debt to cash flow), both senior and total leverage; loan-to-value; liquidity; intercreditor relationships; and bankruptcy considerations.

Ownership Aspects of a company’s ownership to consider include who owns the company; who controls the board; the management team and the breadth of the management team; track record; relationships; strength, reputation and integrity of the ownership/management; and access to additional capital.

Company This is where the majority of due diligence is spent on a transaction. the components of this pillar are quite broad. They include the company profile (franchise business value or diversified business value); strategic risks; execution risks; and industry dynamics.

Capital structure, ownership and company, the three essential pillars for evaluating a transaction. It’s interesting that while I never explicitly spelled out these aspects when working on a transaction, I invariably would touch on most of these topics when working through a transaction.

The next part in this series will look at Capital Structure and some of the aspects of each of the components identified above.