Guide to Raising Capital

Navigating the Capital Markets: An Entrepreneur’s Guide to Raising Capital John Kraska, Managing Partner Lou Caltavuturo, Partner Hales & Company | Hales Capital Securities

Biographies

• Led management buyout of Hales from Arch Capital Group, Ltd in 2004

• Over 15 years experience as an investor and banker, having completed over 75 transactions, representing over $1.5 billion in transaction value

• Graduate of Wharton School and University of Pennsylvania

• Over 20 years experience as a banker and regulatory to the financial services industry with an emphasis in insurance and healthcare

• Prior experience with Fox-Pitt Kelton focusing on capital raising and Deutsche Bank focusing on lending and structured finance

• Graduate of Columbia Business School and Colgate University

Overview of Hales

• Founded in 1973, we are one of the oldest and most experienced advisors specializing in the insurance industry

• Hales Capital Securities is our registered broker-dealer that engages in securities related transactions on behalf of its clients

• Our core business is advising agents, brokers, service providers and companies on corporate finance matters: merger & acquisition transactions and accessing equity and debt capital

• We offer additional financial and strategic advisory services such as due diligence representation, valuation and perpetuation planning

Overview of Hales

Overview of Hales

Overview of Hales

Overview of Hales

Overview of Hales

Guide to Raising Capital

Guide to Raising Capital

• Amortizing and secured against stock or personal guarantees

• 1.5 – 2.5x EBITDA; LIBOR + or Prime + pricing; strict financial covenants

• Bullet loans

• 15% - 25% total cost depending on leverage

• Liquidation preferences, mandatory put options / redemption privileges

• Generally priced to achieve 25% - 40% returns

Guide to Raising Capital

• “All Private Equity firms are the same”

• “My company is worth X, so I can sell 33% of my company for 33% of X”

• “Borrowing is always better than selling equity”

• “I am only raising $10 million or less, that should be easy”

Guide to Raising Capital

Guide to Raising Capital

Guide to Raising Capital

Guide to Raising Capital

Guide to Raising Capital

• Step One: The Business Plan – Why am I raising capital?

• Step Two: The Financial Plan – How much capital do I really need?

• Step Three: The Capital Structure – What kind of capital can I attract?

• Step Four: The Execution – Show me the money!

Step One: The Business Plan

Step One: The Business Plan

• Clear explanation for the use of capital

• Investors never write blank checks or invest in blind pools

• Differentiation in strategy or market – be specific

• What advantage do you have over competitors?
• What is happening in the market that may drive growth?

• Honest self assessment of competitive threats

• Management and track record

Step One: The Business Plan

Step One: The Business Plan

Step Two: The Financial Plan

• Detailed set of financial projections with assumptions

• Earnings, Cash Flow and Balance Sheet
• Detail demonstrates understanding and gives confidence

• Growth rates and margins that make sense

• Anticipate questions from financial analyst types

• They have to defend recommendations to an investment committee

Step Three: The Capital Structure

• What are Lenders demanding?

• Collateral
• Personal guarantees
• Financial covenants
• Co-investment of equity
• Ability to get loans repaid

• What are Equity Investors demanding?

• Aggressive growth/margin hurdles
• Control and governance (i.e., “Alignment”)
• Liquidity

Step Three: The Capital Structure

Step Four: Execution

• Prepare before Contacting Investors

• Determine needs and types of capital
• Control information flow versus reacting to investor demands

• Resources and Focus

• Contact multiple sources simultaneously in a competitive process
• Time consuming: Meetings / Presentations / Follow-up Requests

• Due Diligence and Documentation

• As rigorous and costly as a sale

Step Four: Execution

Conclusions

• Raising capital is harder than you think

• Lots of misconceptions; wide variety of capital sources

• Preparation, process and focus are paramount to success