Shape your business strategy appropriately to achieve your goals
Samson Mojalefa, Associate Director at KPMG, chats to us about Deal Advisory, its role in helping companies to access finance and what this can look like for emerging technology companies.
Within the KPMG group, Samson explains, there are three main service lines: audit, tax and advisory. Within the advisory space, there are various business units. These include technology, management consulting, forensics, internal auditing, financial risk management and deal advisory.
“Within deal advisory, we say: We buy, we sell, we fix, we partner and we fund. That speaks to our service offerings. Regarding our mergers and acquisitions services offering, we don’t have our own balance sheet, however we will advise clients who want to buy or sell assets, and we will walk that journey with them,” Samson explains. “We also provide independent corporate valuations for our clients. These might be required for any number of reasons. For example, for financial reporting purposes, fairness opinions, shareholder dispute resolutions or for a transaction. Our third service line is transaction services. This includes due diligence services where we identify the risks and synergies/opportunities either for an acquisition or a disposal.”
Samson says that when technology firms turn to deal advisory for funding, it’s typically for what is known as a capital raise, which speaks to the “fund” service offering. The process usually begins with the deal advisory team seeking to understand the technology business and the type of capital (and the amount) it is seeking to raise. “We would ask things like what their ambitions are, what their strategy is, and what their long-term objectives are,” says Samson. “We would look at the optimal capital structure or correct mix of debt and equity funding. Typically, it’s more beneficial for an organisation to have a higher percentage of debt funding, because debt is cheaper funding and equity requires a higher return. Equity funding normally comes from the owners, however we do tap into our network of private equity players when equity needs to raised for a transaction.”
KPMG Deal Advisory tends to work on deals starting from R100m (roughly US$7.5m) or more. If an entity were looking for debt funding, the Deal Advisory team would typically approach financial institutions on its behalf. “We would draft the capital raise document, build the financial model and approach institutions with the client as their advisors. The capital raise document, known as an Information Memorandum, will typically include an overview of the business, the investing opportunity, overview of the market that the business operates in, overview of the business itself as well as financial forecasts. We will really walk that journey with them and help them to raise that capital.”
He says banks tend to be wary of providing capital to start-ups. “Banks are looking for companies that can demonstrate a track record of operating for several years, with proven products, proven markets, and a proven management team. They want something they can bank on. With start-ups, we would typically look to what we would call a venture capital firm or private equity firm. They are willing to take higher risk in the hope of earning a higher multiple.”
Private equity firms tend to have a higher risk appetite, but still require some track record, stable management and good cash-flow. Venture capital firms, on the other hand, have much higher risk appetite, but generally require much higher returns in the form of larger equity stakes. They are often willing to assist firms at an earlier stage and help with refining the business plan or model.
The benefits of working with a facilitator like KPMG Deal Advisory is that they collate all the documentation required, from the pitching document to the financial models, in formats that the financial institutions and funders are looking for. “We’re all experts in our own fields, so we leave the guys who are great at building widgets to do that, and we can support them with providing the contacts and help with the numbers,” Samson says. “We understand what the banks want from the numbers perspective in terms of the financial structure and creating a target capital structure (the balance of debt and equity in the business) that will ensure the business generates a return to not only pay back shareholders, but to service any debt. What we do is really about structuring the best deal.”
Ideally, Samson says, the company seeking funding would bring its financial information to the Deal Advisory team, to help give some insight into its finances. “We work across a large number of industries and so we’re quite good at doing any required research ourselves, as long as the entrepreneur or company management has a good understanding of the business, what their end goal is, the financial targets they want to reach and the amount of funding they require,” he says.
His advice to emerging technology companies seeking funding is to go to funders or advisors with more than an idea. “You need to be able to carefully articulate not only your technology capabilities, but your vision and your strategy for achieving it,” he says. “You need to be able to explain the journey you will walk with the funder to achieve your goals, and what is in it for the funder at the end.”
He encourages firms to consider using Deal Advisory services. “We’ve got the expertise from a funding perspective, the knowledge from a sector perspective and we’ve done a lot of these deals, so we understand the markets. Don’t be afraid to use us – we do add value, not only in terms of accessing funding but in helping you to shape your strategy as a business to achieve your end goals.”
For insights into the top three trends in the financial services deal market in 2019, watch this video from Giuseppe Latorre, KPMG’s Global Financial Services Deal Advisory Lead: