How Fairness Opinions Actually Work in a DESPAC Transaction — Michael Moscarelli

– Welcome and Introducing Michael Moscarelli

SPEAKER_00 0:00

What's going on, everybody? It's your host, Chaz with the DSPAC podcast. This is gonna be an interesting one today. So, a lot of the big headache, um, a lot of the litigation, a lot of uh all of the infighting that could happen, it all comes down to valuation. So today I've got Mike Mascarelli with me from Hulahan Capital, aka Mike Philly, Philly Mike, um, because there's a couple of these guys that are running around claiming the Mike name. So, Mike, what's going on, brother? Glad to have you with us today. Yeah, Chaz, thanks for having me on. Appreciate it. Absolutely. So, okay, first of all, tell me uh tell me a little bit about uh about Hulahan Capital, what you guys do with valuations, just to kind of get things fired off.

SPEAKER_01 0:51

Yeah, for sure. So Hulahan's full service uh investment banking and valuation shop. So on the one side of the house, we're a lower middle market investment bank, um, doing all sorts of deals, all sorts all sorts of industries. And then on the valuation side, we've kind of got two key focuses. We've got portfolio valuations. So we value you know private equity, venture capital portfolios all up and down the capital stack. Uh, we're industry agnostic, we do all sorts of work there, um, valuing hundreds and hundreds of companies in any given year. So we we see a little bit of everything. And then we do transaction opinions as well. We've got a little bit of a niche carved out in the fairness opinion space for D SPACs, which is kind of why we're we're talking right now. Um, and that's kind of the other side of our practice. So we do will value literally anything that walks in the door. Um, and we've been doing it for quite some time. So that's the rundown.

– What Is a SPAC Fairness Opinion and Why Does It Matter

SPEAKER_00 1:42

No, I appreciate it, man. I appreciate it. Okay, so talk to me about this. Um, whenever you've got a fairness opinion, like you've got this SPAC team that'll come to you, approach you. Um, what does that mean for the target? And why does a SPAC team even come to you for a fairness opinion?

SPEAKER_01 2:03

Right. So they they come to us um historically because you know the the D SPAC space can have sub litigation risk, right? And they want to make sure they've had uh a third-party validation of the financial fairness of the deal, right? There's kind of two components there's financial fairness, they call it fair pricing and fair dealing. It's how you demonstrate that you've you've done your diligence, done a deal uh fairly and correctly. Um the the fair process side of things, you you kind of cover just in the course of documenting what you've done as you go through the deal. Fair pricing is part of where the fairness opinion comes in, right? So you hire us to prepare. Um, typically it's a board presentation and a letter saying, we've been through the deal, we've been through the transaction, we've been through the company, we've done our diligence, and we feel that you know this transaction's fair on a purely financial basis. And we deliver that. So they come to us mostly because they need that third-party check. They want uh sort of a first line of defense in the event there's any litigation around the valuation after the transaction. Um, and it it helps give the board a level of certainty as well that you know where this is all shaking out is a number they can feel comfortable with. Now, on the on the target side, um you may think, well, okay, the fairness doesn't affect me, right? Like it's fairness delivery. Why should they care? Right. Why should you care? Well, at the end of the day, you're you're gonna be a combined company together, you're gonna be a team together. You will share certain litigation risks on the transaction. And also a lot of the information that you share with the SPAC team may end up in a fairness opinion and may then end up being disclosed, which I think is an important, uh, an important thing to kind of touch on. A lot of folks don't understand. So that uh it it affects you a little bit more than you might realize at the outset, you know, when the SPAC team starts talking a lot more. A lot more.

– Fair Pricing vs. Fair Process: The Two-Part Framework

SPEAKER_00 3:49

A lot more. So, okay. So like let's uh let's dive into that a little bit. Um, like I I think sometimes people like something that everybody understands is the idea of if you go buy a house and they're gonna basically do an appraisal on the home. That way everybody can kind of justify that the house really is what uh what it's worth, you know, and and what everybody's hoping that it's worth. And in that same way, you've got a fairness opinion that's like they're trying to determine that, but I feel like there's probably way more to it and complexity. Um, so unpack a little bit about what they're actually trying to determine with this fairness opinion. For sure.

SPEAKER_01 4:33

There, there's kind of two key components. And the first one is really just the value of the business, right? And now I I think this can be the most personal, kind of the most touchy thing is you have a SPAC team who's, you know, their managers in in the space they're looking at. They've valued companies before, they they feel confident in the number they've come up with. And then you've got the target management who's been running this company and they feel very confident about where they're gonna shake out. Um they have shareholders to look after, they have their own employees who this might be their liquidity, this might be their exit. They they everyone on both sides of the deal, you know, has pretty strong opinions about the number, right? So that's kind of step one is the the fairness opinion provider comes in and they they just come to a valuation of the company, of the target company, and typically it's the combined company, right? Assuming the transaction's completed. Um so they they that's step one, right? We really need to get to what is this company worth, do our diligence as you would with any valuation exercise, um, go through the data room, speak to management on both sides of the deal, understand, you know, the meat and potatoes of the company. Um, and then I think the second component that a lot of folks, when they're engaging a fairness opinion provider for the space, don't think about as much is the allocation component on the transaction, right? Because the biggest focus of regulators here really is what are what are you getting per share on the other end of the deal if you're a public shareholder in a SPAC. And so that is one of those where our expertise in the space, our understanding of the vehicle really comes into play is being able to determine fairness down to the per share level instead of just saying, yeah, you know, the enterprise value that you guys came up with is it's pretty much fine and we're good with it. So there's kind of those two key focuses as we go through our process.

SPEAKER_00 6:20

So, and and further to that point, just to like just so our audience, particularly on the on the target private company side, can understand this. When it comes down to valuation, like you said, it's it's so personal, right? Like this is the area to where there can be a lot of drama that kind of comes to the surface around this, because for like whenever it's whenever it's money, money feels personal to people, right? You know, like you've got you've got your equity position, everything that you have felt that your baby is worth. And and the SPAC team for them, um they're like they're trying to typically they're trying to look at it from a completely different vantage point. They're trying to look at it as how is the market going to receive this different, which is a completely different attitude. And so I'd love if you could unpack just for a moment kind of the the dynamic and complexity that's there, um, really helping the the private company from what you have seen, because you've seen some of this, right? Um, helping them understand like how can they really get there to um to accepting a valuation that might seem different from what they were expecting it should be. Because, like, prime example right now, um, I will tell you that I know that some AI companies aren't getting the valuations that they were one year ago. And they're just like, no, what? No, we know we're worth more. And then pharmaceutical companies, like pharmaceuticals, not in vogue right now. And so as a result, they're not getting the valuation that they were whenever the CEO did a different deal two years ago with another company. And he's like, and he's perplexed by that, right? So um if you could unpack how that works just a little bit and how these guys should be able to kind of come to grips with it.

SPEAKER_01 8:13

Absolutely. Yeah, I mean, you touched on the time component, right? There's a reason that people want deals to move quickly. Um, you may strike a price early and you may have an understanding of where that value should be, and the market may completely shift against you. Things may change by the time you get to a BCA. So that's always good to keep in mind. Um, I think it's it's really good for for uh for teams on the target side to understand um the complexities of the vehicle. Because SPA, you know, when a SPAC team comes in and does this this deal, does a D SPAC, um, it's not just about that headline number. And I think that's really where it gets pretty emotional, right? Is well, I raised my last round at 250 mil, we should be at at least four, right? And that that can really, it can be difficult to understand where the SPAC team's coming from, but you you have to think on the on the end of the D SPAC, right? You're both now going to be, you know, equity holders in this combined company. You have to consider things like warrant dilution, um, if there's any earnout components in the transaction, uh, if there's anything on the sponsor side, right? There's sponsor shares that need to come into the transaction. You need to think about the redemption price of the outstanding SPAC vehicle. If they've been out there a while, you know, they're they could be talking about an$11 plus redemption price. So um there's a lot they have to compete with to ensure that the the structure of the vehicle makes sense after the transaction. So even if they come with a a headline value that that doesn't really feel quite right on your end, you just have to think about it on a pro forma basis, right?

SPEAKER_00 9:44

There and and also there is there's the component of litigation that's there. And like, and we'll dive into this more in in a minute, but like, but I mean, obviously that's where DNO comes into play, right? But uh, but like there is this concept of of litigation to where it's like you're darned if you do, you're darned if you don't. If you go too high on pricing, then as soon as the combination happens, the market is gonna crucify you and your stock is gonna tank because the SPAC team gave you what you wanted for a price, but the market's not honoring it. And the market's not gonna lie to you and tell you that you're worth more than you are. But then on the converse side of that, if you go and you don't get enough money on the deal, then you undersold, then you have your inside shareholders on the private company, and those shareholders could end up potentially suing for a derivative lawsuit to undo the whole thing. Um, so it's like you you have to come, and that's where you and Houlihan and like the fairness opinion come in to be able to justify where everything really lands, right?

SPEAKER_01 10:53

Right. And you touched on this, which I didn't even mention, but you know, if there's outside capital in transaction as well, it's not just litigation on the other side. It's you know, this back team wants to go raise a hundred and fifty million dollar pipe. Well, the the valuation of the company needs to be able to bear that additional capital, right? They need to be completely understanding of okay, you got to a reasonable valuation, it can support this additional capital. Capital might be slightly dilutive. Um, that's an additional component to consider is the you know, the dream of the combined company often relies on a lot of that capital coming in the door. Um, so your your valuation needs to be right for that as well.

SPEAKER_00 11:27

Yeah, yeah, yeah. So, okay, let's let's shift gears. What are some of the common pitfalls that you see in a D SPAC transaction as the fairness opinion provider?

SPEAKER_01 11:40

Yeah, I think the consideration of that, that dilutive component, I think is the biggest thing, right? A lot of operators in this space have they have experience in private equity, experience in venture capital. They're used to an exit transaction where maybe some of that dilutive component is not as important, right? It's like I'm gonna sell you a portfolio company for your portfolio, we're gonna swap at 400 million, it's an all-cash transaction, it's nice and clean. Um I think considering those elements and understanding the potentially dilutive components of the structure is definitely one of the biggest pitfalls. I think projections, which are always something that comes up both on the disclosure side and the fairness opinion side, um, can be a, you know, a risk and also a blessing for both sides of the transaction. It's it's something I think um when the question finally gets asked by the fairness opinion provider, it's almost too late. You know, like it needs to needs to really be considered. What are we comfortable disclosing? Um what is our support for these projections? Um that component comes up a lot. Uh and then I think, you know, really just from the outset, it's kind of the overarching thing, is just valuation issues uh broadly. It can just be very emotional to set a high-level price, and sometimes just it it doesn't work in the structure when you when you get to the end of things there.

SPEAKER_00 13:01

Dude, so talking about things not working, so let's talk about this. Let's for for our targets that are listening, these private companies looking to go public through a D SPAC, maybe. Let's say that they they they find the SPAC team, they're excited, they struck the deal, and they negotiated what they think is going to be a great headline valuation. And then all of a sudden, once they get to where you've come across and the and maybe by the time they're they're ready to announce the BCA, everything has shifted. Um what do they like what what might an actual value the company receive look like that could that could be different whenever the deal closes?

SPEAKER_01 13:47

Yeah. I mean, the the danger is is what you sometimes see in these, which is the value is just a little bit too high. There's some additional dilution that wasn't priced into that consideration. And then when this gets into private markets, um you you just get, or sorry, public markets, you just get ripped to shreds, right? And and sometimes that is really a structure problem. Sometimes it is, well, you know, there were these uh sponsor shares and there was warrants that got exercised, and there was a slightly dilutive pipe component, and it just wasn't uh, it was too much for the valuation to bear. But on the other side of that, it is sometimes just the the story of the business is not something that holds up uh under public scrutiny, right? I mean, you're going to be just like any other public company publishing regular quarterly filings, you're going to be um putting, you know, the entire story of your company out there for people to dissect. And that's where actually kind of one of the benefits of the fairness meeting process is having a third party come in and start to think in that direction, right? Is in a complete vacuum, disregard this transaction. You know, is the story and the value of this company something that that a public market uh participant could bear? And that's where um I think that can be just helpful, helpful to think about, right? Everything is pro forma.

– Breaking Down the Cap Table: Sponsor Shares, Warrants, Rights, and PIPE

SPEAKER_00 15:03

Yeah. Okay, okay. So let's talk about this. You've mentioned the word dilutive about four times so far. And so I don't want to get away from that because because here's the reality. Um, a spec vehicle in most cases is gonna be more dilutive than an IPO. It just is. And um and and so the result though, and so some people are just like, well, I don't want to do that. It then it's more dilutive. Well, then do an IPO if you can, right? Like, I mean, but but the unfortunate reality is is that um SPACs they fill the void for these companies that are trying to get public, but the IPO traditional process isn't the right option for them. A direct listing isn't the right option for them. They're trying to seek monster public capital, and this is the way that it gets done. And so, like, and and there is there is dilution that comes as a result of this. And because the SPAC team, they did all of that heavy lifting, did everything to make themselves bring this deal together to add value to you post-combination, all that kind of stuff. So, like, let's talk about real quick how do things like the sponsor shares, riots or warrants, earnouts, and the pipe, everybody forgets about the pipe, uh affect what the target shareholders ultimately end up with. Can you like take a couple of minutes and unpack that?

SPEAKER_01 16:34

For sure. Yeah, we can kind of like step down the cap table as far as as far as where those things start to play in. Um, the first one that I think actually gets overlooked sometimes, um, the the exchange ratio between the SPAC and the now the currently private company. Um, a lot of the time these deals are struck at, you know,$10 a share is the value for the SPAC. Um, and that uh it is somewhat advantageous, right? It's only bringing in$10 a share of dilution, but you might have 1050, you might have$11 because the SPAC has set that capital aside and it's accrued some value over time. So you're bringing in trust uh capital at say$11 a share, but you're only paying$10 a share for the public shares. That's great, that's good for you. Um now sometimes uh they'll be negotiated so that the exchange ratio happens at the redemption price, and that kind of cancels out that that effect, but they still effectively come in at zero dilution. So the public shareholders um typically are not going to be the cause of much dilution, but it is just something to understand, right? To double check the way the deal is structured. Um then there's sponsor capital. Uh this is this is going to be dilutive, right? I mean, these are shares that were issued from the outset. Um, they are getting in without bringing any cash on board. So they're they're gonna be dilutive to the combination. And the way to think of that is, you know, there is no free lunch for access to public capital, right? You're gonna pay somebody either way, be it an IPO, be it a D SPAC, you're you're compensating someone to get this access, right?

SPEAKER_00 18:09

So Well, and real quick, I I would want to say this. I wouldn't want to say that that they're getting those shares for free. The SPAC team put millions of dollars on the lines to get that IPO done and to have operating capital to get through the combination.

SPEAKER_01 18:24

Right, right. Sorry, free in the context of the deal in that they are fully dilutive, right? They're not bringing capital. They did do all the legwork, right?

SPEAKER_00 18:30

The a public people are the sponsor teams to be like, you got those shares free.

SPEAKER_01 18:35

You know, my my sincere apologies to the uh SPAC community there. They are not free. They they put in they put in the hours and hours and all of the capital to get this thing going, right? So that's that's where they're coming in. It will be diluted. Please continue. I'm so sorry. No, no, you're you're good. I'm glad we could clarify. Um so that's something to consider, right? And and that's the nice because it's really not going to shift, right? You know those shares are there. They're in the S1, um, they're not going anywhere. They will sometimes have various uh various um potential terms where they they may slightly decrease or increase in amount, but for the most part, they're pretty fixed, and and you don't really have to worry too much about them shifting. Um you have to think about the warrants. There's usually uh, and we've we've seen this sort of trend change. I think there used to be more warrant coverage uh in SPAC vehicles a few years ago. They've kind of fallen out of favor a little bit. Um, they're typically struck at 1150 per share uh for the strike price. So they're not gonna be massively dilutive. Um they're at best, they're gonna be slightly out of the money. Um, so there is a component there of dilution, but it's it's nothing crazy. Um, but it is something you should consider, right? They are potentially issuable shares. They may not be outstanding at the close of the BCA. Uh, but if this company does well and it exceeds that 1150 share price, then they will likely be outstanding. So you you have to consider that uh as part of the transaction.

SPEAKER_00 20:03

Yep.

SPEAKER_01 20:03

And rights as well. Rights are um definitely a lot less common, I think. They there was a period there where they were showing up in deals. They show up sporadically, but they're a little bit of additional dilution there. Um, and those are the main ones. And then I I think the pipe isn't a big question because pipe terms are flexible, pipe terms are negotiated, they could be, you know, a$10 a share entrant. Um, they could be substantially lower, they could be at seven or eight. So it's that that's a big one to consider. And I think you know, you need that capital, right? A lot of the time that capital is going to really propel you to getting to the business to be where you want it to be and get that initial jump start after the D SPAC. Uh, but it is worth considering that it it can be dilutive to your position, especially immediately after uh the close of the business combination. There could be some some lag there because of the dilution, uh dilute dilutive effects. So those are kind of the big ones though, the the the major components, I'd say.

– Key Deal Terms Targets Must Lock Down in Negotiations

SPEAKER_00 21:00

So, okay. Um let's and I appreciate that, man. Actually, I thought that was really good. So let's talk next. Um, what are some of the terms that these private companies should be paying attention to when they're negotiating? Um, that they should really just like be laser focused on and not miss whenever they're uh whenever they're managing negotiations with the SPAC team. For sure.

SPEAKER_01 21:28

Um exchange ratio, which we we touched on. That's the headline, right? That's the easy one. Um I will say cash minimums, absolutely, delete uh cash delivery from the BCA. That has uh definitely been something we see on almost every transaction now. Uh there needs to be a it's helpful to have a guaranteed level of cash coming into the deal. Uh that is, after all, you know, part of the reason for doing a D spec, right? Is to bring that money in, um, you know, jumpstart the company, get to your strategic goals using that capital. So You want to make sure the cash minimum is something that that makes sense in the context of the story you're trying to tell public markets. You also will just want to be cognizant of the fact that that cash minimum can be uh can be difficult to achieve. You know, going out and raising a$100 million pipe is is no small feat. Um, and managing redemptions is a very, very difficult thing for a spec manager to do. And many of them do it successfully, but just note that the higher that cash minimum is, there's more pressure on their side. So they may, you know, balk at that a little bit. Um that's that's a big one for sure. And then from there, it's it's a lot of the you know, refer to your council. Um there's a lot of lot of various steel components that are that are less, I think, effective to the end, at least economic result of the transaction. Um but before we move on to that, I think the big one is any contingent consideration. Um we haven't seen earnouts and the like uh too often in the D spec space, but they do appear. Um they're very, very difficult to value and to put a number on. They're kind of opaque. Um, they're a good way of aligning incentives between both teams. So you you do see them from time to time, but it's something to consider if if any sort of contingent component does show up, it it's a lot more difficult to price than just a straight change in the value of the equity.

SPEAKER_00 23:23

I like that. That one's uh yeah, that one can be uh a little hard to nail down, a little ambiguous. Yes, and tough for valuation folks as well. I mean, not gonna lie, that's a much more complicated analysis. So, okay, so let's talk about that. So, whenever it's tough for you, I know in the world of insurance, like in DNO insurance, DNO underwriters do not like what they can't predict. And so if they can't predict it, they're gonna price higher because of the uncertainty that's there. How does that work for you guys from a valuation standpoint? Is it similar?

SPEAKER_01 23:55

Yeah, it it could certainly increase the price of the engagement if that complexity is there. I think even outside of that, it is um more time consuming when you know you're you're in a deal mode, right? You want to get your opinion done as quick as possible, as complete as possible. Um, it also, I think, in a potential litigation scenario, is a much more specialized field of practice. The people who price those kinds of things, usually typically it's it's Monte Carlo simulation and very, very involved models to do that kind of analysis. Um, it's very hard to explain to a board of directors. It's very hard to explain in the litigation scenario. It typically requires experts going back and forth. Um it is a very complicated, very opaque part of the process. So it does, I I think unless it's completely necessary for the transaction to proceed, it probably causes um maybe more issues than than someone would expect up front. It seems pretty straightforward.

SPEAKER_00 24:56

So heightened litigation potential, heightened cost. Potentially, yes, I would say so. Okay.

SPEAKER_01 25:03

Not a guarantee, but it's definitely uh an addition, a component that doesn't appear frequently in these. And and frankly, if you've engaged an opinion provider on the on the spec side, um, you may find that that surpasses the limits of what they're comfortable with and able to handle from a technical perspective. Uh, because it does require some some more specialized personnel typically.

SPEAKER_00 25:25

So if these uh so let's jump in real quick. Like you've got all these issues that can come up. Um how does a fairness opinion really bring it to the surface in a way that, because you talked about the complexity that's there and how it can be really difficult to understand? How like how can a team, a private company team, look at these issues that come to the surface and and really unpack it and understand it? Does like, does your team help walk them through it and and give them clarity? Or do you just here's your PDF of your report, like whatever we can charge you if you want to come ask us a question? I I mean, how does that work?

SPEAKER_01 26:09

Yeah, I I think it is it is difficult as a you know as a target management team because the you know the SPAC has engaged the fairness opinion. And technically, you know, their it's delivered to their board or their special committee.

SPEAKER_00 26:22

Um you technically work for the SPAC.

– Who Pays for the Fairness Opinion and How Fees Are Structured

SPEAKER_01 26:24

Right. And that's I mean, it's it's something to bear in mind as well, is you you may, as a target, have um sort of limited interaction with the fairness opinion team. You may uh they may ask for a management interview, they may have questions around projections or financials for the company. You may you may interact with them. Um, but at the end of the day, they've been engaged by the SPAC team. So you do want to be cognizant when you're um, you know, interacting with them, sending information back and forth is like it's fairly similar to disclosing something to the SPAC because they've been engaged by the SPAC. Um just gonna be cognizant of that. It it really, I mean, if you are looking for a full like technical understanding of the transaction, you want to model it yourself, um, you can always engage uh an outside valuation provider or fairness opinion provider to take a look at the transaction. I would say a fairness opinion is probably overkill for the target. Um, you you typically wouldn't necessarily need one, but you can absolutely engage uh an advisory firm to go through and walk through the numbers of the transaction for you. Luckily, all the information um, you know, it's in filings, it's very publicly available for these transactions.

SPEAKER_00 27:30

Okay, so let's talk about this because we we mentioned that technically you're engaged by the SPAC team, but let's talk about who bears the cost and how much it costs. Where does that usually kind of shake out?

SPEAKER_01 27:48

For sure. It it's it's a range. Um, and and we will say like there is such a thing as too cheap and too expensive in this space. Um, I typically say, you know, it's it's six to seven figures. Depends on the name that you want. It depends on the the size of the transaction. I will say if you're you know, if you're doing a deal in the billions, you you might be at towards the middle or the higher part of that range. If it's a smaller deal, you might be towards the lower part. Um, it can vary, and it's all based on complexity and the potential for litigation risk. Um it's a lot that goes into pricing that. Um, but again, as a as a target team, it's worth considering that frequently those uh the payments for that opinion will sort of be tranched. There'll be certain milestones, or some of it will be paid after the closing of the transaction, and that's by the pro forma company. So even though you haven't engaged them, it may be something that you're on the hook for on the and and that's true with, I mean, many of the fees going into the transaction. So it just adds to what you should be cognizant of. So it's worth um, you know, speaking to your counterpart is just understanding that. Um in most transactions, I would say the fee is not something that's material on the other end necessarily, but hey, it's it's cash out the door. So you want to be cognizant of where that's headed.

SPEAKER_00 29:01

So let's talk real quick about fee opinion, like uh fee structures for these fairness opinions. Like, how do you how do you often see it done? And what's uh and and is there anything to where the target should look at the deal economics on that and uh and say, like, hey, this is trash, we need to renegotiate this or something of that nature. Like right.

SPEAKER_01 29:29

Most providers you work with will have done enough of these that they understand how to price them appropriately, how to sort of, if they're going to do it in tranches, which has become more and more the market standard, um, how to do that in a way that's appropriate and and good with sort of legal teams. Um, the big red flag, I think, for a target and for a spec team as well, uh, is you never want any component of it to be contingent, right? You never want a quid pro quo, never a hey, if our opinion is fair, we get paid, if it's not fair, we don't. That completely gets rid of the validity of the opinion. Uh, and that leaves both teams, because again, you're gonna be combined on the other side of this, that leaves both of you pretty liable, right? It it gets rid of the entire purpose of the opinion. Um, so you just want to be that would be the the one term I would just be cognizant of. Uh it's it's pretty uh unlikely that a team would even recommend that, but you just that's the only thing I'd watch out for.

SPEAKER_00 30:23

That's a really, really good idea. Like just just uh it because it does. It you're you're no longer you're you're no longer truly unbiased in there. You're you're gonna throw out a number that is gonna get the deal done, kind of thing, is what an attorney could bring up in the courts. Exactly.

SPEAKER_01 30:43

You don't even want the hint of that being a thing. Um, and worth verifying independence as well. You know, um you you want to make sure the uh sponsor team isn't necessarily like bringing in a banker they're super friendly with and have done a million, you know, that that's something to at least disclose uh if they have a pre-existing relationship. Those are the only two that that kind of come up.

SPEAKER_00 31:03

So, okay. Um let's say that I'm I'm CFO, CEO of this private company, we're looking to do the deal, and we uh like we're uh we're going talking to the SPAC team, you guys ultimately get engaged, so we're talking to you. What is gonna be asked of my private company during the process?

– What the Fairness Opinion Team Will Ask of Target Management

SPEAKER_01 31:28

Yeah, absolutely. Um, most of the information you've already gathered for the transaction um is gonna help the fairness opinion team immensely, right? There will probably be a data room for the deal. There'll probably be uh diligence that's already been done, and that's gonna get uh most fairness opinion providers 90% of the way there. Uh the two things I would be cognizant of as a target team is the um the forecast, any projections, which we've kind of mentioned before, right? Is those, if they end up in the opinion, are fair game for disclosure, will end up in public filings. Um making sure to consider you know, is this the final set of the forecast? Is this the one we're comfortable with disclosing? Have we thought through all the inputs? And then the second way you're going to interact with the target or the fairness opinion team is likely a management interview. So they'll go through all the information and they'll just have some follow-up questions. They'll want to make sure they understand. Um typically, you won't see like, you know, a word-for-word transcript of that conversation. That's not typical, but you will um see many potential inputs into their fairness analysis might come from that discussion. So it's worth prepping beforehand, understand, make sure you're you're communicating the story of the business as you've communicated it a thousand times at that point. Um, and just making sure you're you're answering questions the way you want them to be answered. Uh, but that that's kind of the two major ways you would interact with uh an opinion provider.

SPEAKER_00 32:52

I appreciate that. So okay, let me ask this. Um I'm I'm trying to think of the best way to to really frame this question for you. You've got a you've got a private company, and sometimes I see these companies to where, man, they're not super responsive for whatever reason. Maybe they're just really busy, or maybe they just don't see you as a priority. Um, like what is the the range of expediency that these things get turned around? Like, what's the fastest usually gets done? And whenever you have a private team that's not responsive, um, how long can you see these things drag out?

SPEAKER_01 33:38

Yeah, I think uh, you know, the the ideal time frame, two to three weeks, if everyone's pretty aligned uh and we can get the transaction moving and get the team moving. Um, I've seen them go as long as two, two and a half months. Um, that's definitely a less an ideal scenario, as as anyone who's done deals would would agree. Um things can things can drag if if that happens, if there's a lot of back and forth or things are just unclear. I'd say that's pretty rare, but they can go that long if if that's uh the way things progress. And then the I think the quickest I've I've seen, you know, these can get turned in a week, sometimes shorter. Um sometimes it's a matter of, you know, the market is doing what it's doing. There's a lot of volatility, we need to turn this in a week, and some people are going to lose some nights and weekends, and that's okay. Um, but you typically, if you can, you want to engage a team so that they'll have time to go through the transaction, to be thorough. It it likely I'd say reduces your risk of any oversights by giving an appropriate amount of time when you engage an opinion provider. Um, not to say you can't do it faster, but it's it's probably best practice to leave two to three weeks.

SPEAKER_00 34:47

Got it. Okay, so let's let's talk about um let's talk about efficiency because I know that like, man, if you're if you're trying to do a D spec, it is just like it feels like it's kind of all hands, 24-7, you're going hard, and time is a very, very precious commodity. What are things that these private companies can do from a standpoint of efficiency to like to make it to where when they get into this process that they've already got, like while maybe now, while they've got a little breathing room, even though they probably don't feel like they do, they have no idea what's coming, maybe, but it's uh it but it's one of those things to where now they have a little bit more breathing room. What could they do to just improve the the quality of what they're gonna put together and organization of what they're gonna be needing to put together so that they can hand it to you? And this is just one thing that uh that reduces friction for them.

– How to Prepare Now: Financial Statements, Data Rooms, and Forecasts

SPEAKER_01 35:53

For sure. I'd say, you know, financial statement preparedness is probably the biggest thing for anyone going into a D SPAC. Okay. Um, you know, having any required audits completed, maybe engaging an outside firm to ensure that you've presented everything in a way that is going to make the process expedient. Um, having all of that set and structured is just going to save you so much time and so much back and forth. And I think the industry broadly, I think, has really taken a liking to those targets that are prepared and ready. Um, in the last couple of years, I'd say we've seen a much stronger sense of preparedness from targets who have thought about this, right? They they knew what their potential exit was going to be. They did exactly as you're saying. They spent six months, they went through their financials, they went through uh, you know, effectively build your own data room, right? If we do this deal, what kind of deliverables do we have? What do they look like? What sort of condition are they in? Um, and take the time to do that, and it will absolutely speed the process along to a to a substantial degree. And there are, you know, if you look up uh, you know, third-party diligence firm request list, just pull one up and go down the list and take a take a checklist of have do I have these things? And if I have them, are they something I can share with outside advisors without any embarrassment? You know, are they put together? Are they not shabby? Um, and just go through that process and it will save you a lot of time.

SPEAKER_00 37:15

So, real quick, one thing you touched you touched on a minute ago was you were talking about financial advisory teams, right? Like, I mean, whether it's somebody from uh Cohen Resnick or or like whatever. And so you've got these teams that are doing financial advisory work. Do you usually work with them, or are you traditionally working with the CFO? Like, who's normally the main person you're gonna interact with?

SPEAKER_01 37:44

I'd say CFO is is most common. Uh, and that's actually on both teams, CFO of the SPAC typically, and then CFO of the target is who we're most likely to interact with, I would say.

SPEAKER_00 37:55

Okay. No, it was just with you bringing that up, that was a question where I was like, you know, it's it's fair and people should kind of know like, is it really gonna be on the CFO or is the financial advisory team gonna handle the kind of the crux?

SPEAKER_01 38:07

And we have seen that where an advisory, you know, outside advisory team is handling a lot of those communications, and and we're perfectly fine to do that as well. Um, but it it is typically the CFO is kind of leading the charge there.

SPEAKER_00 38:18

So appreciate that. And this section, but like before we kind of jump to something else, I want to ask one final question. Um, what are some of the bottlenecks, like common bottleneck issues that maybe we haven't already talked about that are there that could turn this from being a two or a three-week process into a month and a half, two months or something?

SPEAKER_01 38:43

Yeah. Um, having financials and forecasts ready, that that can slow things down. Um I would say uh availability of the team, oddly enough. I mean, obviously you're in a deal, right? Like you are busy, but making the time as a target, you know, take 30 minutes and being able to schedule a management call to keep the fairness penny moving can can really save you some time there. Um term shifting is another one, which I think a lot of teams don't consider is you know, a fairness opinion is is given based on a set of terms. And if you then go and change anything that's you know material to the economics of the transaction, obviously to have an opinion that's useful, you you sort of need to do another turn of the opinion. So worth being cognizant of that. You know, any change you make, let your provider know and understand that there might be some some time to implement that and bring it into the analysis.

SPEAKER_00 39:36

Cool. Okay, so let's shift gears. Um, private companies, probably done private company deals, probably done MA type transactions before. How is a fairness opinion for a SPAC transaction going to be differentiated from other types of private fairness opinions that they've probably come across before? For sure.

– How DESPAC Fairness Opinions Differ from Private M&A Opinions

SPEAKER_01 40:00

Biggest difference, it's usually we see it done on a per share basis. Um, you almost don't ever see that in private company transaction opinions. They're almost always here's an enterprise value, here's what the consideration is worth. If those are in a reasonable range of each other, we're good to go. Um, because of the regulatory scrutiny, um, the sort of sense of we need to protect uh common stock public SPAC shareholders, we need to understand um that their decision is between redeeming their shares and going forward with the transaction. And that decision is made on really a per share basis. So that's the biggest difference. And I think some teams get taken aback by like, okay, why are you digging into like my cap table and asking me all these questions? Like, you're just valuing the business, like you don't need to do all that. Um, that can be a bit of a change of gears for frankly for teams on both sides, I think for the SPAC teams as well. Um can just be a bit of a difference, I'd say, in practice.

SPEAKER_00 41:01

So speaking of difference, let's talk about like wait, we kind of touched on this earlier, you know, like if if you were just a traditional IPO candidate and great for that, you'd probably do a traditional IPO, but you're not, you're in, you're doing a SPAC vehicle, which I love SPAC vehicles. I think that they're absolutely phenomenal when they're done with excellence. Um but but here's the thing that you're the typical company that's gonna fit in the box of of a SPAC in doing a DSPAC process is gonna be like often earlier stage um or like higher growth companies. So how do you like how do you see that that affects the analysis of everything? Um yeah.

SPEAKER_01 41:51

It can mean being uh a little more outside the box, I would say. Um luckily, you know, like our firm does a ton of venture capital portfolio valuations. Um we do lots of work where you know information may be light or the company is still scaling, and you can't just, you know, take a revenue multiple and call it a day. Um I think that is is a big difference, right? Obviously that the targets are are a different type of company. And it's worth noting for teams as you look to gather your advisors around you, um, making sure they're okay with that level of uh obviously the ambiguity around the growth component that they've seen early stage companies before and that they're comfortable dealing uh in that environment. I think that's uh a big differentiator between, say, a traditional IPO and a D SPAC.

SPEAKER_00 42:40

I appreciate that. Um so let me ask this. Um why is it that you think that it's I mean, just kind of go deeper for me if you could into the why behind that. Like, why is it you think that the targets that SPACs end up doing deals with tend to be these earlier stage or super high growth type companies?

SPEAKER_01 43:09

For sure. I think you know, traditional IPOs are they're this, there's so many parties, there's such this is such this undertaking to make it happen that I think the uncertainty of a venture stage company can kind of it can be a lot to handle. And it makes it a lot more difficult for those committed to it, to the IPO, to kind of buy in and feel comfortable going all the way through that process. I think because you know, with a DSPAC, you have like a pretty much decision being made by a single team who can get behind the vision, um, who can communicate that to shareholders. I think that does tend to make it uh a little bit more of a better path for those growth stage companies. And it does mean just earlier access to public capital than an IPO would typically allow you. And I think that kind of creates a really, really interesting dynamic. And can I I might, you know, potentially have some effect on post-BCA trading activity, where uh it can be a little hard for public markets to understand what they're looking at when they're used to these like mature, very well fleshed out companies. Um I I I think that is a big differentiator app like completely. I mean, that's that's the biggest difference.

SPEAKER_00 44:23

And I which is why I think that like one of the big missteps that these companies, when they when they go public through a D SPAC, one of the big missteps that I see is that they they fail to say, we have all of this capital. This is this is what we're going to do in a grandiose scale, but more importantly, this is what we're gonna do in the next quarter. And then in that next quarter, reporting. We told you we were gonna do this, check, did it. This is what we're gonna do within the next quarter. Report it, check. Like when you're hitting and showing the market that you're executing on the strategy, it's so mission critical because you're not like you're not the well-established, like already IPO groomed type of company. So you have to be constantly delivering, delivering, delivering. And they failed to do that. So earlier you were you mentioned that you were talking about it's a lot. So speaking of it being a lot, you're from Philadelphia. Yeah, and like and I feel like sports in Philadelphia, it like being a Philadelphia sports fan can be a lot, and it can be, man. Like you guys, um like you are you an Eagles fan?

SPEAKER_01 45:40

I I am an Eagles fan by by sort of by birthright. I don't follow it nearly as much as I should, but the entire family is every game is being watched. Super Bowl is like the equivalent of a national holiday for Philadelphia. It's yeah.

SPEAKER_00 45:54

I mean, and you like you know it's your birthright, whatever, you know that you guys are probably like the most hated, disgusting fans. No, absolutely. We no, we love that. We we definitely we own that. You embrace the fact that you're just like that you guys are just nasty.

SPEAKER_01 46:08

Oh, yeah, yeah, absolutely. And no, no one's no one, we we take a little bit of pride in that for sure. Absolutely.

SPEAKER_00 46:14

Wow, okay, that's crazy. That's crazy. Okay, so if it's not the Eagles, who is it for you? What's the what's the squad?

SPEAKER_01 46:22

Oh man, I don't know. I don't have a ton of like I again, I'm terrible about it. And I went to like I went to Venova for grad school too, and they're always like, you know, basketball teams.

SPEAKER_00 46:32

I need to keep up with all of this much more. Dude, March Madness is done. Michigan edges out you can't. I got killed at the Lula hand bracket was uh it was brutal. Oh, okay, okay. Let's let's skip on to my last question that I've got kind of in this segment. Um, we're getting close to wrapping up here, but I want to find out for you like the trust, the redemption mechanics that are there, the promote. Um, there's all these factors. How do you how do you put all of this in the box and and how do they how do they work in harmony for you guys to be able to come out with a proper fairness opinion?

SPEAKER_01 47:12

For sure. Some of it is is uh experience in space and being able to make certain assumptions, like as you mentioned, you know, the redemption component, right? Every single SPAC team comes into this and on the other side of the target team as well. I mean, redemptions are uh a make or break for a lot of these transactions. Um, so having an understanding of you know, where are historical redemptions at, what's a reasonable assumption, has management gone ahead and made any non-redemptive agreements? Are there non-redemptive agreements all the way back in the S1, which believe it or not, we've we've seen where they were made early on? Um all of that has to be factored in. Um, some of that is like on a on a sliding scale, right? You have to understand the interplay there. Um same with the the warrant structure as well. That's all kind of an iterative calculation of okay, you can include this this price, which changes the the spot price for the warrant, which changes the dilutive effect of the warrant, and kind of this whole thing. So I think it is just having experience. We've done, I looked it up this morning, we've done 27 D SPAC fairness opinions to date. Me personally, I've done somewhere between 12 and 15 of those. Um having experience in the space. We publish a quarterly report on the SPAC space with a lot of those uh those key metrics built into it. Um, that's really the the thing that makes or breaks an opinion is just demonstrating you understand the vehicle, demonstrating you understand the purpose of the transaction, and then making sure that your opinion reflects all of that background knowledge.

– Why Projections Become Public Record and Why That Should Concern You

SPEAKER_00 48:46

That's clutch. Okay, so as uh as a target management team, should they be worried about how financial projections are going to be used in the fairness opinion? And I would I would guess yes, but I mean I'd love to hear that from you.

SPEAKER_01 49:08

Yeah, I and I I think it's you know, whenever any additional disclosures come up, I think worry is the term that gets thrown around, right? It's like, do I really have to put this out there? Like, I don't know how comfortable we are. Um, I wouldn't say worried, but you should be cognizant, right? Of if I give this projection to a fairness, fairness opinion provider so they can get through their fairness opinion, where does that end up? And typically the answer is it ends up in public filings. And now you're a combined company. You're you may be management of the combined company. And as you mentioned earlier, you're a public company. Those projections are not just projections to get through a fairness opinion, those are publicly disclosed projections for your public company. And if you can't meet those projections, it will be um very impactful on the traded price of the company going forward. So you should be cognizant of them. You should make sure you have thought through them completely, understood uh what disclosures they may result in, um, and then ensure after the transaction that you remember you handed those out and you're you're speaking to those and and managing the company around the goals that that you put in place.

SPEAKER_00 50:16

Mike, you're so much more politically correct than me. I genuinely think that they should be worried. Like, and the reason why I would say that, it's your first time. Yeah. Like it's your first time having a healthy amount of fear on on the numbers you put out there for your very first time. Because if you don't hit, you will be crucified like Jesus, like in the public markets. Like the the reality is is people they're they're like, oh, I mean, because before when you were private, if you didn't hit your numbers, what happened? Your PE group barked at you. Like, I mean, like what? Like, but but what's what's the what's the problem? Now, all of a sudden, if you put those numbers out there and you fail to hit and you fail to hit, like, I mean, it's one of those deals to where it doesn't take long to where litigation ensues from shareholders. And so, like, there is, I believe, a genuine, healthy fear that should be there when you're new at doing it, because you need to you need to put those numbers out there with more caution, with more trepidation, with more care, especially when you haven't proven crap to the market. And like, so and so I mean, I I I appreciate being cognitive and thoughtful and mindful, yes, no, but also have a healthy amount of fear because it's like because you should, it's no longer flippant that you're throwing the numbers out there. So if you're a private team that's doing a D SPAC, be conservative. Don't be braggadocious. If you're conservative in your numbers, then like I mean, we've all heard that saying underpromise, over-deliver. And if you can underpromise and over-deliver, the market will reward you for that.

SPEAKER_01 52:04

For sure. And worth remembering as well. I mean, your your investor set's different, right? As a private company, you've got all these qualified investors, they're much more insulated from downturns. They can weather the storm, they have a longer holding period frequently. Um, you know, public capital is gonna think a lot more short short term, they're gonna be a lot less forgiving in the long run.

SPEAKER_00 52:25

So, okay, so let's let's talk about that. Let's talk about making a set of credible projections that are defensible from a valuation standpoint. What are some of the what what are some of the key metrics that they need to be thinking of there? For sure.

SPEAKER_01 52:43

Two key, two key things that we really like to see. Um, one is underlying inputs, you know, unit economics, you know, some way that you're forecasting that's not just, well, we think we can grow 60% year over year, 60% top line, we think margins will stay consistent or grow to well below well well above the industry. Um, you want to make sure everything is benchmarked as much as possible to the existing product or any planned products on as as granular a level that is is reasonable that you can support. And then the other kind of component there is that you should understand your historical performance. Uh, if you have only done, you know,$100,000 worth of revenue and you think you're gonna do 60 million in the following year after you're public, you really need to have uh a lot of data and a lot of support interconnecting those two things, right? Like that's a huge claim in a vacuum. Um, and you don't want to be caught just putting out projections where you you've kind of taken a step back and just drawn a line and done a little hockey stick growth and said, okay, well, that's probably good. Um, you really need to make sure that as much as possible you're tying into your historicals, understanding, you know, what is built into the numbers that you're actually proposing, right? That's a lot of ground to cover. Um, and if it's even feasible, you know, if it's a sales-based thing, can you hire enough salespeople to make that possible? What's the hit rate of those salespeople? How many calls can they make in a day? Things like that, um, down to a more granular level, uh, make a forecast for us and for public markets just that much more believable.

SPEAKER_00 54:17

Yeah. Yeah. Okay. So, and man, I love that you put it that way because like everybody thinks, oh, if I've got money and I throw the money at it, and and they do, unfortunately, they'll get you get a hundred million dollars that flows in, all of a sudden you quit thinking like an entrepreneur and you just start thinking like daddy warbucks and throwing cash around. And like, and it's one of those deals to where unfortunately, whenever you lose that entrepreneurial um fire within these with these companies sometimes and just start throwing money at crap, you end up just with this accelerated burn rate that the market will hate that. They will absolutely hate it whenever you lose that entrepreneurial fire. And like, and so you've got to make sure that you're locking in like disciplined, disciplined sales teams and doing all of these other variables that you're talking about. They like you still have to execute and you need to do it with efficiency. And I feel that efficiency is one of the major areas to where people they they think, oh, we want to execute, and so they sacrifice efficiency in hopes of the execution, which ultimately um they don't get to achieve the end goal with the dollars they have because they run out of money too quick.

SPEAKER_01 55:32

Right. And I think it's important that you kind of touched on this, you know, show progress during the deal. Just because you're doing this transaction doesn't mean you need to set it up and you're still an entrepreneur, run the business the same way you would. And we've seen that with very successful teams where you know they threw out this projection and then the deal dragged on, and then they started hitting that projection. They said, look, we need the money, the money's gonna make a big difference, but we can still execute in the meantime. And that really adds credibility.

SPEAKER_00 55:57

Okay, so I'm gonna ask two final questions. Number one is what is a rigorous fairness opinion process? Um, what is it gonna do, bottom line, to benefit the management team of this private company by providing some validation to their numbers? Like, how does it really help them to validate who they think that they are?

SPEAKER_02 56:21

Yeah.

SPEAKER_01 56:22

What it does really in the event of litigation is it's a first line of defense, right? It shows that you have done your diligence, it shows that you have thoroughly investigated this number. It should be specific to the industry. It should have folks who have done lots of deals in that space who understand what they're talking about. It should be specific to the D SPAC vehicle. Um, and it should really demonstrate a knowledge and understanding of the transaction and provide that first line of defense, right? It's not going to be, you know, you're not going to show up to a litigation and be like, well, here's my fairness opinion. You guys talk it over. We'll come back later. Um, you're still going to have to litigate things, but it should just demonstrate that you have done um what you say you have done. And it it that's really the purpose at the end of the day.

SPEAKER_00 57:07

Awesome, man. Okay, so I appreciate it. Now I I'm somebody who is a firm believer. Final question, that that people love doing business with people that they like. And you've obviously, you know, been showing over the past hour that you know your stuff. Um, and that part is awesome and that's beautiful. But uh let's talk real quick, just I mean, a couple of touch points about you. Number one is uh you you mentioned that you went to Villanova, that you live in Philly. Like, have you just been Philly like like just OG all your life? I mean, do you like what's kind of the dynamic? Do you got a family there? Are you living downtown gangster style? Are you out in the burbs? Like, what are you doing?

SPEAKER_01 57:48

Yeah, yeah, yeah. I've been Philly my whole life. I grew up in the suburbs. I went to undergrad in the city at Temple, uh, North Philadelphia. And then I lived there for a little bit downtown, and then I went to grad school at Villanova on the main line, and now I'm living back out in the suburbs. Um, so I've been Philadelphia area whole time. Um, love the city, it's great, great size, uh, does does a lot of actually a lot of great business in this area. Um, but it's awesome. I mean, it's just great. It's so easy to get around, it's so accessible, it's it's an awesome city. And well, you know, sports teams, of course, but we'll have to go to that.

SPEAKER_00 58:22

So so on the rare occasion to where you actually break free from that like that den of iniquity that is Philadelphia, because I'm a Cowboys fan. So um it's so on the rare time that you break away from Philly, um, where is the like most epic place that you think that you've ever visited?

SPEAKER_01 58:45

Epic? Probably I went to Peru a couple years ago, did like Machu Picchu and everything. Oh that's one of the things that's just sorry. What did you love about it? Was it the architecture, the tacos? Like what's what's the stuff? Oh, just just incredible. I mean, it's one of those things where you know you think you look around the US, right? I've been I've been all over the country, and you see things, you're like, okay, those are old and very impressive, and that's very cool. And you go to Machu Picchu and you're like, okay, well, they built this by rolling stuff up a giant hill, and it took thousands of I mean, it's just absolutely mind-blowing. Um, yeah. I will have to say that that I mean, it's beautiful country otherwise. I mean, cities and stuff are great, the people are amazing. Um, but that's just one of those things that just completely blows your mind. I mean, you can't even comprehend how something like that can be constructed. It's it's really amazing. I love it. I love it.

SPEAKER_00 59:33

All right, so everybody, we got Philly Mike from Hulahan Capitol. The guy is uh is legendary whenever it comes to SPAC D SPAC valuations. So I just want to make sure that all of you know about him. His information will be in the in the link below. So don't hesitate, reach out if he's any, if he's got anything that he can do to add value to you, show you love, support. And then from there, Mike, thanks so much for sharing time with us on the D SPAC podcast. I appreciate you.

SPEAKER_01 1:00:05

Yeah, absolutely. Appreciate it. This is great.

SPEAKER_00 1:00:07

Everybody, I'm Chaz with Churchwell Insurance Agency, your host of the D SPAC podcast. We're out.