Sellers NEED To Take Stock!

Sellers NEED To Take Stock!

In previous posts, I’ve discussed how seller financing is the key to acquisition financing. While seller notes are certainly helpful, nothing pushes an acquisition like a seller excited about owning stock in the newly combined entity. For cash-strapped micro-caps, sellers really need to take some stock for the deal to close.

At Acquis, we know how important is is that buyers, sellers, and investors, “row the boat in the same direction”. In fact, our logo represents that coordinated effort. Buyers clearly have a goal of seeing the newly combined entity succeed and, as equity driven participants at Acquis, we too have a lot riding on future business success. Seller motives, on the other hand, tend to vary.

I have seen sellers begging for more stock and I have seen sellers literally say “I don’t want any of your company’s stock”. As a buyer, which of these two extremes would you prefer to work with? Hopefully, you agree that it’s the seller who wants your stock.

A seller who believes in the future of the business (and proves it by taking a significant equity position a/k/a a “rollover“) is the kind of seller who will encourage investors & lenders, be flexible with a buyer to make the deal work, and help the newly combined entity succeed in the future.

So what if a seller only wants cash? My advice would be to proceed with caution. While there are often legitimate reasons for wanting more cash, those reasons typically don’t favor the buyer. For cash-strapped acquirers, raising capital can be difficult and that process is made even harder when sellers ask for more cash as they signal that they don’t believe the future of the business. Not taking stock signals that sellers don’t think the newly combined entity will be successful and perhaps they don’t believe in the future of the target itself.

I speak with a lot of cash-strapped acquirers. Some run around spending money they don’t have on targets that are looking for a big payday while others target deals using stock and other forms of seller financing (with small cash components). In my experience, the buyers who spend too much money they don’t have don’t succeed and those that “sell” sellers on the future of the combined entity have a much higher success rate.

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.
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As The Slopes Begin To Thaw, Jay Peak’s Assets Are Frozen.

As The Slopes Begin To Thaw, Jay Peak's Assets Are Frozen.
Jay Peak Ski Resort president Bill Stenger

Last Thursday, the Securities & Exchange Commission announced “fraud charges and an asset freeze against a Vermont-based ski resort and related businesses allegedly misusing millions of dollars raised through investments solicited under the EB-5 Immigrant Investor Program.

That “Vermont-based ski resort” is Jay Peak, Vermont’s northernmost ski resort. The mountain is perhaps as well known for its use of the EB-5 program as it is for great terrain and snow conditions.

For those of you who don’t know what the EB-5 program is – the program is a path to U.S. citizenship through investment. The program requires applicants to “invest $1,000,000, or at least $500,000 in a targeted employment area (high unemployment or rural area)

Jay Peak has used the EB-5 program to raise “over $350 million from foreign investors to expand its facilities and create local jobs“. While some of the funds were indeed used to expand the Jay Peak facilities and create jobs, according to the SEC, $200 million was misappropriated including “$50 million of investor funds intended for an expansion of the property [used for] personal expenses“.

The SEC charges that the owners of Jay Peak, Ariel Quiros and William Stenger, inappropriately used funds for things like; “buying Jay Peak from its previous Canadian owners, and the funding of credit lines, income tax payments, purchases of real estate, and the repayment of sizable margin loans“.

Quiros lives in Miami according to investigators and shortly after the SEC announcement a “federal judge in Miami ordered the assets of Jay Peak and related businesses frozen“.

As the Vermont ski season comes to an end and the mountains begin to thaw, Jay Peak (assets) will remain frozen. At least the SEC waited for the end of ski season!

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Damn Spotify, Back At It Again With The Convertible Debt!

Spotify just raised $1 billion with convertible debt after announcing  $500MM in convertible debt a few months ago. In reaction, TechCrunch posted an article titled “Spotify raises $1 billion in debt with devilish terms to fight Apple Music“. While the writers at TechCrunch may think the terms of the convertible debt  are “devilish”, this financing seems more angelic to me.

Key Terms Are As Follows:

–  $1 billion in convertible debt from “TPG, Dragoneer, and clients of Goldman Sachs

– 20% discount to IPO price

If no IPO within the next year, discount goes up 2.5% every extra six months

– 5% annual interest on the debt

Plus 1% more every six months up to a total of 10%

– Note holders subject to 90-day lockup after the IPO (90 days less than 180-day lockup period for Spotify’s employees and other investors)

While this deal has the potential to hurt early investors (including employees and other shareholders), it is only a problem if Spotify (and thus the IPO) doesn’t perform well. In my opinion, that is the only real negative of this deal.

As I’ve discussed in previous posts, its hard out there for unicorns (especially those, like Pebble, competing with well-funded tech giants). So why is this a good deal?

Why This Is A Good Deal For Spotify:

Comparatively, Terms Are Decent: While the terms may appear rich to some, they are not so bad considering the ratchets, liquidation preferences, and other anti-dilution type covenants rampant among late stage unicorn financings. Additionally, more traditional financing consist of locked in valuations providing substantial upside in addition to downside protections.

VCs Are Nervous: Traditional VCs have become cautious of unicorns as exit options are limited (slow IPO market), firms write down the value of their unicorn holdings, and unicorns begin to fail or suffer down rounds.

Competition Is Fierce: Competition has drastically increased and, like Pepple, Spotify is now competing with Apple and other well-funded players.

Valuation Determined In Future: In a difficult environment for unicorn financing, Spotify can maintain its valuation while raising significant capital all priced in the future when the company and or markets are (hopefully) in better condition.

 

Bottom Line:

If Spotify plans on performing well, this deal isn’t “devilish”! But, if Spotify plans on struggling to grow and compete then this deal will be bad for Spotify but, at that point, they will have bigger problems than convertible debt.

I should also point out that, “while there were reports in January they were looking to raise $500 million via convertible debt it’s not clear whether that amount was raised, or the $1 billion we are seeing today is the result of those attempts“. At the time, the terms on the $500MM (leaked by a Swedish newspaper) outlined a 17.5% discount and 4.5% annual interest compared to 20% and 5% respectively for this $1 billion round.  

What do you think? Is this a good deal for Spotify? Does Spotify have any other options? Will Spotify win the music streaming wars?


 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.