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any loss incurred by those buying the shares。
Term sheet
A term sheet is a funding offer from a capital provider。 It lays out the amount
of an investment and the conditions under which the new investors expect
the business owners to work using their money。
The first page of the term sheet states the amount offered and the form
of the funds （a bond； mon stock； preferred stock； a promissory note
or a bination of these）。 A price； either per ￡1；000 unit of debt or per
share of stock； is quoted to set the cost basis for investors ‘ge。。ing in’ on
your pany。 Later that starting price will be very important in deciding
capital gains and any taxes due at acquisition； IPO （initial public offering）
or shares/units transferred。
Another key ponent of the term sheet is the ‘post…closing capitalization’。
That is the proposed cash value of the venture on the day the terms
are accepted。 For example； investors may offer ￡500；000 in Series A preferred
stock at 50 pence per share （1 million shares） with a post…closing cap
of ￡2 million。 This translates into a 25 per cent ownership stake in the firm
（￡500；000 divided by ￡2 million）。
The next section of the term sheet is typically a table that summarizes the
capital structure of your pany。 Investors generally start with preferred
stock in order to gain a priority of distribution； should the enterprise fail
and the liquidation of assets occur。 The typical way to handle this is to have
the preferred stock be convertible into mon stock on a 1 ： 1 ratio at the
investors’ option； such that the preferred position is essentially a mon
stock position； but with priority of repayment over the founders’ own
mon…stock position。
Other terms included on the sheet could cover rents； equipment； levels
of debt vs equity； minimum and maximum time periods associated with
Finance 65
the transfer of shares； vesting in additional shares； and option periods for
making subsequent investments and having ‘right of first refusal’ when
other rounds of funding are sought in the future。
Public capital
Stock markets are the place where serious businesses raise serious money。
It’s possible to raise anything from a few million to tens of billions； expect
the costs and efforts in ge。。ing listed to match those stellar figures。 The
basic idea is that owners sell shares in their businesses that in effect bring
in a whole ra。。 of new ‘owners’ who in turn have a stake in the businesses’
future profits。 When they want out； they sell their shares on to other
investors。 The share price moves up and down to ensure that there are as
many buyers as sellers at any one time。
Going public also puts a stamp of respectability on you and your pany。
It will enhance the status and credibility of your business； and it will
enable you to borrow more against the ‘security’ provided by your new
shareholders； should you so wish。 Your shares will also provide an a。。ractive
way to retain and motivate key staff。 If they are given； or rather are allowed
to earn； share options at discounted prices； they too can participate in the
capital gains you are making。 With a public share listing you can now join
in the takeover and asset…stripping game。 When your share price is high
and things are going well you can look out for weaker firms to gobble up
– and all you have to do is to offer them more of your shares in return for
theirs。 You do not even have to find real money。 But of course this is a twosided
game and you also may now bee the target of a hostile bid。
You may find that being in the public eye not only cramps your style but
fills up your engagement diary too。 Most CEOs of public panies find
that they have to spend up to a quarter of their time ‘in the City’ explaining
their strategies； in the months preceding and the first years following their
going public。 It is not unusual for so much management time to have been
devoted to answering accountants’ and stockbrokers’ questions that there is
not enough time to run the day…to…day business； and profits drop as a direct
consequence。
The City also creates its own ‘pressure’ both to seduce panies onto
the market and then by expecting them to perform beyond any reasonable
expectation。 There have been a number of high…profile examples of panies
that have floated their shares on a stock market then changed their
minds and withdrawn； buying out all outside shareholders。 The rationale
for taking a pany private is that the buyer feels that they can run the
pany be。。er without the need to justify their decisions to other shareholders；
or the plex and burdensome regulations that public panies
must ply with。
66 The Thirty…Day MBA
The Saga saga
The name that is synonymous with providing holidays exclusively for
the over…50s is undoubtedly Saga’s。 The business； started in 1951 with the
daunting name of ‘Old People’s Travel Bureau’； was an experiment by
Folkestone hotelier Sidney De Haan。 He believed that older holidaymakers
would appreciate a quieter off…season break by the sea； charging just ￡6。10s；
including travel； full board and three excursions。 Over the next decade the
pany chartered trains； planes and finally bought its own charter boat；
the Saga Rose。 Along the way it launched a magazine； insurance business
and a clutch of FM radio stations。 Over a third of the UK’s over…50s are on
Saga’s database； which holds 7 million individuals of whom over 2 million
actively buy from Saga each year。 By January 2007 the pany was making
￡158。2m in profits and employing 3；800 people worldwide。
The pany’s financing history has been something of a rollercoaster。
Initially financed using family money and bank debt； the firm was floated
on the stock market in 1978。 Saga was not a hit with investors though；
partly because of the weakening UK holiday market。 The De Haan family
took the group private in 1990； buying out all the other investors。 By 2004
the pany was preparing to go back onto the stock market when the
private equity firm； Charterhouse Capital Partners； paid ￡1。35 billion to
take control of the group and t