By Joel Block
One of the original attendees of our Deal Making Symposium and Syndication Seminar called me recently with an opportunity that he wanted to discuss. Someone wanted to help raise capital for an alumnus and he wanted help with those issues. However, the fund raising and related securities issues are not the purpose of this article, but rather to educate that it`s possible to pay people for helping to arrange financing of different kinds even the equity tranche.
The issue that caught my eye and one that I caution our Deal Making Symposium attendees to be laser- focused on is that of structuring the deal properly, so that the promoter maximizes his or her opportunity. The promoter has to go into the deal prepared for as many contingencies as possible because failing to do so might erode the promoter`s ultimate compensation. If there is a shortfall the only place to recapture dollars is going to be from the promoter`s share. It will rarely come from the investor`s share unless there`s a catastrophic problem.
In the case of our alumnus (the Promoter), his prospective finder expects some compensation, but the deal did not contain any structure for paying finders of capital on the front end of the deal. The only dollars being paid on the front end were to the promoter for real estate commissions. It was never the promoter`s intention to use the real estate commissions to pay finder`s fees.
Hence, the deal had not been designed correctly.
My immediate sense is that once the real estate aspect of the deal became imminent, a phone call was placed to an attorney who was asked to put together a syndication package including a Private Placement Memorandum (PPM), Operating Agreement and Subscription Agreement. I don`t get any sense that a business person designed the deal ” the attorney probably wasn`t told exactly what arrangements to make for fees and profit sharing. The promoter probably just asked for some good documents and paid over $20,000. But, because the attorney was not specifically directed on how to structure the syndication, the promoter will probably walk away with a lot less money than expected.
This is not in any way a criticism of the attorney. It`s the promoter`s responsibility to provide the direction of putting the deal together. I never allow attorneys to construct my deals. I always construct them myself and I help the attendees of our Deal Making Symposium program to calculate those transactions so they`re done correctly from a financial and business point of view. I don`t prepare the legalities, that`s the lawyer`s job. But the lawyer doesn`t map out the business structure because that`s the responsibility of the business people.
You must be very careful when you`re putting together these transactions. Think carefully through what the likely business issues will be. Plan for them and incorporate them into your documents. If you don`t lay out the deal correctly, then you will inevitably end up on the short end of the stick.
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