The questions entrepreneurs ask
themselves when growing quickly.
Our Direct Investing division was launched in 2016, and since then we’ve invested ourselves wholeheartedly in helping Canadian entrepreneurs look for new ways to unlock additional capital and fuel their ambition.
Below you will find our most frequently asked questions when clients approach us with a vision toward business expansion.
What is Gap Debt™?
Gap Debt™ is a long-term debt instrument for promising companies that are cash flowing or near break-even, but do not have access to sufficient traditional debt financing to fuel their growth. This is the “gap”. Alternatively, those promising companies may be raising a round of institutional equity; Gap Debt™ can be a substitute or complement to this equity, thereby reducing shareholder dilution.
What does my business need to qualify?
To qualify for Gap Debt™ financing, your business must show the following to receive consideration:
- Revenues: $2M+ and annual growth above sector average, or monthly recurring revenue of $80k+.
- Operating Profitability: Must have excellent visibility into cash flows; if negative, must anticipate break-even within 18 months.
- Enterprise Value: Business value in an M&A context can be readily substantiated
- Forecasting: Must have deep insights into the future of the business.
- Management: Owners must have “skin in the game”, share our values, be an impressive and cohesive team, and have financial acumen.
- Location: Must have a headquarters in Canada.
- Sector: Industry agnostic.
- Use of Funds: Generally, for growth (acquisitions, working capital, etc.) or dividend recapitalizations.
What is the difference between FirePower and other similar funds?
We are truly entrepreneurial; we’ve built this business from scratch and speak the same language as our borrowers. While our Private Capital division has only existed since 2016, we’re already one of the most active investment banks in the country. Our activity in the current climate gives our borrowers access and insight into valuation multiples, strategic buyers’ appetites and tactics, and best practices for exits. We also invite our borrowers to join our ecosystem: a powerful network of entrepreneurs, investors and advisors we have invested in, or with. Finally, we’re deeply invested in your goals – after all, it’s our money on the line.
Why borrow Gap Debt™?
Gap Debt™ unlocks capital from intangible assets, helping you in areas traditional banks are afraid to go. It’s also a quicker source of capital than equity, is an effective substitute for venture capital and can act as a bridge to venture capital if it’s not available yet. Gap Debt™ also minimizes dilution and the cost of capital relative to raising equity, while allowing borrowers to retain control of strategic direction and the board.
We’ve found through experience that Gap Debt™ generates a healthier management philosophy than venture capital, which can distort behaviours such as imposing more discipline to reach profitability (not growth for growth’s sake). We can structure Gap Debt™ to match your growth strategy and ability to make payments. Contact us today for a consultation and see if Gap Debt™ works for your business vision.
Do you provide loans to pre-revenue start-ups or distressed companies?
Do you provide loans for real estate or construction projects, mining or oil and gas prospecting, or drug research?
How much can I borrow?
Loan sizes range from $1 million to $20 million.
What are your rates and terms?
We step into situations where few other lenders would play, and our returns are commensurate with our willingness to assume risk. When we are a substitute for equity, we are by definition more costly in the short term (because it is a loan: there is interest and principal to service), but will become far cheaper than equity at an exit (because the investor takes home a good portion of the proceeds from the sale).
a) Interest Rate >10%.
b) Upside: warrants, equity kickers, bonuses, or royalties.
Term: 12 to 36 months.
Security Ranking: First position, or second position behind a line of credit.
Disbursements: Flexible – capital can be made available on closing, or in tranches tied to growth milestones.
Principal Repayment: Tailored to growth strategy, e.g. deferral of principal payments for up to 12 months, large bullet payment at end of term, seasonality adjustments.
What information should I prepare to maximize my chances of securing Gap Debt™ ?
As a lender, our objective is to get our loan back with a return that is commensurate with our risk. In putting together information, keep this in mind: we want to take care of the downside, and in our view the upside will take care of itself. Being a lender that focuses on cash flows instead of assets, we spend a lot of time performing due diligence on your financials, both historicals and forecasts. Be ready to provide annual statements (at least review engagements) prepared by a reputable accounting firm, interim in-house statements, and projections for at least a year with detailed assumptions (e.g. a customer-by-customer sales pipeline).
Also make sure your house is in order and well documented – we will want to see contracts and agreements, read management bios, review your marketing collateral and pricing and evaluate your mid-term growth plans. To move quickly, we need to see information quickly. It’s better to be upfront about the challenges and risks you face, and offer ways to mitigate them. So be clear about what the financing is to be used for, and what impact it will have.
What is the process for obtaining Gap Debt™ financing and how long does it take?
We can move quickly when necessary; in fact, we made our first loan in under 60 days, from the first meeting to disbursement. After a first meeting or call, we will make a few basic information requests: a presentation on the financing opportunity, accountant-prepared financial statements, forecasts and any other salient data we may need. We’ll then review your file in greater detail, ask a few clarifying questions, likely request a few more documents and arrange for an in-person meeting. Ideally, we’ll now be in a position to present a term sheet.
After negotiations and agreeing to terms, we enter into legal and confirmatory due diligence. If that checks out, we will make a binding letter of offer, which once executed by both sides, will educate the drafting of loan agreements. Upon signing of the loan agreements and the satisfaction of any pre-disbursement conditions, we will make our first advance.
Why use FirePower to identify and acquire targets?
Our buy-side practice specializes in identifying and connecting with private business owners in Canada. Other advisors typically focus on transactional or due diligence services, which are more technical in nature. We speak the owners’ language and scope out their willingness to sell quickly and efficiently.
As an established investment bank, our outreach sends a strong signal that our client is a serious buyer. We have an in-house team of six deal origination specialists that lead our acquisition efforts, offering you capabilities unmatched in Canada.
Within our confidential database, we have tens of thousands of prospects whose exit intentions are well documented. Our proprietary deal platform is optimized to rapidly map out the universe of possible targets, track them and report on them.
What kinds of buyers do you work with?
We tend to work with buyers operating in a fragmented industry that has dozens of possible targets, backed by a financial sponsor and with access to an acquisition credit facility. It helps if buyers have bought at least one other business in the past, and have established a process.
In what situations can FirePower advise on financing?
Firstly, the financing opportunity must be outside our Private Capital division’s scope. We will not advise on deals that other lenders would perceive as transactions we could have done ourselves but chose not to – that would put you at a huge disadvantage.
Once it’s determined a deal is squarely outside our Private Capital division’s scope, we can guide companies through the full spectrum of debt instruments, be it senior term debt, asset-based loans, unitranche debt, revolving facilities, royalty-based financing and so on.
The four main situations that involve our Investment Bank’s expertise in a debt raise are as follows:
1. Financing organic growth.
2. Securing financing for an acquisition, or structuring an acquisition facility for a string of purchases.
3. Refinancing current debt (in both going-concerns and distressed situations).
4. Executing on shareholder-driven events (e.g. management buyouts, dividend recapitalization).
What kinds of companies do you advise?
Companies we advise must be able to secure debt financing and be seeking a minimum of $2 million. When this is a given, we tend to advise in the following capacities:
1. As a trouble-shooter if the raise isn’t straightforward (we can’t add much value when a profitable company is looking to simply refinance their line of credit).
2. As an intermediary between various stakeholders, such as when a portion of a management team is organizing a buy-out.
3. As a facilitator to get multiple investors at the table and have them compete for the business.
Can you raise equity?
Only in exceptional circumstances, though is not our specialty. In most cases we will help our clients find a more suitable advisor from within our alliance network.
Why engage FirePower as an advisor?
We’re lenders, too. We keenly understand credit and speak lenders’ language, and will work with you to anticipate and mitigate their credit concerns. Yet we’re also entrepreneurial – we’ve built our business from scratch and understand what it’s like to be in your shoes. Today, we’re recognized as one of the best sources of deal flow for our lenders – a deal from us goes to the top of the proverbial pile.
We have our thumb on the pulse of the lending community and know what’s possible at given rates and terms. We have over 300 active borrowers in our network across Canada and at larger institutions, we know the account managers that get deals done.
Finally, our investment bank closes 79% of the mandates it is engaged on (overall). The industry average? 25%.
From the archives: July 2018
A Tale of Two Offers: Price vs. Structure
Imagine this situation (not hypothetical—it is an adaptation of one of our firm’s live deals): After taking years to build a successful company, your…
TFI is the largest distributor of specialty food preparation equipment and training programs in Canada, supplying over 10,000 locations. We advised management on financing the buy-out of existing shareholders.
Rhyno Equity Group
Rhyno is a private equity firm that acquires mid-market manufacturing companies in the GTA. Their partners engaged us to structure the debt component of a buy-out of a kitchen cabinet maker.
One of three equal shareholders of Corrosion Service, an infrastructure services company, approached FirePower, seeking to buy out the other two. Although this was a highly sensitive situation, we were able to raise the debt financing necessary for a successful close.