Lawyers seeking funds for clients whose business partners have exercised shotgun clauses in buy-sell agreements will be interested in Argosy Partners' new Shotgun Fund, an equity venture designed to ensure that buy-sell opportunities don't die for lack of financing.
Most experienced commercial lawyers have been through the scenario.
Shareholders or partnership agreement. Buy-sell provision with shotgun clause. Unhappy partners or shareholders. Off goes the shotgun C usually with a lowball offer. Offeree wants to buy so he or she can avoid selling at below fair value.
The problem is that financing is difficult to obtain under these circumstances.
Says Miller Thomson's Frank Shostak: "Generally an individual has 15 to 30 days to obtain financing. No bank can respond that quickly unless they have a long-standing relationship with the company. And even if they do, most of the value of the transaction is in goodwill supported by non-tangible assets, on the basis of which banks are not usually willing to advance."
"In any event," Shostak adds, "most of these types of businesses are financed on a bootstrap basis (with the principals' own equity), so there isn't a financial institution that's familiar with the business."
According to Argosy principal Richard Reid, the Shotgun Fund offers a unique source of risk capital for clients with personal or financial constraints who are confronted with partners pulling the trigger on a low ball offer.
An internal KPMG Corporate Finance Inc. memorandum indicates that the "ideal target" for Shotgun Fund financing "will be a private company in business for at least three years with strong management, an enterprise value between $5 million and $25 million and sales between $10 million and $100 million."
Reid's partner, James Ambrose, says that The Shotgun Fund is the "only fund in North America specializing in shotguns." With $20 million on hand currently, Argosy will advance amounts between $1 million and $10 million on appropriate transactions, typically in the manufacturing, distribution, or service sectors where applicants are "open to having an outside shareholder."
Reid also emphasizes his company's responsiveness to the time-sensitive nature of shotguns: "We'll respond with a rejection or a contingent offer within 48 hours of being contacted, and our due diligence process is geared to short time frames."
Shostak says the Shotgun Fund is a "brilliant, incredibly creative idea that meets the needs of the shotgun with very quick turnaround."
Argosy's approach is certainly novel. After reviewing financial statements, the company interviews the applicant in the presence of a court reporter for as long as it takes to do a verbal due diligence. Based on what they hear, they decide whether to commit funds.
"Having committed the funds, Argosy then does a full due diligence," Shostak explains. "If the applicant's verbal information checks out, Argosy advances equity; if it doesn't, Argosy advances a loan that has to be repaid within six months."
Helen Daley of Toronto's Kelly Affleck resorted to the Shotgun Fund on behalf of a client involved in an oppression action.
"Our adversaries used delaying tactics that made it very difficult for us to obtain financing," Daley recalls. "But Argosy went in and did a due diligence on one hour's notice, which was exactly what we were looking for."
The financing didn't go through, as the case settled on other terms. But Daley credits the availability of Shotgun Fund financing as being "extremely helpful in resolving things favourably."
Similarly, George Karayannides of Heenan Blaikie's Toronto office recalls that Argosy met with his client "in very short order."
"The Shotgun Fund is a great product," he says. "It's a very focused, single-purpose fund geared to deal with short time lines. My client was extremely happy with the attention he received."
Adds Donahue & Partners Grant Haynen, who has done some legal work for Argosy's principals: "These guys get up the learning curve a lot faster than other sources of financing."
From a business of law perspective, Argosy promises to protect referring lawyers' relationships with their clients. "We recognize the importance of partnering with the legal community," Reid says.